A standard corporation, often referred to as a C corporation, is a legal entity that is separate from its owners. A corporation is owned by its shareholders and, under state law, generally provides limited liability protection to those shareholders. This means shareholders are typically not personally responsible for the debts and liabilities of the corporation solely by reason of owning shares. However, exceptions may apply, including where a shareholder personally guarantees an obligation, engages in misconduct, or where other legal grounds exist to impose personal liability.
Tax considerations are often an important factor when deciding which type of business structure to form. A C corporation is generally taxed as a separate entity. Corporate profits are taxed to the corporation when earned. If the corporation later distributes profits to shareholders in the form of dividends, those dividends may also be taxed to the shareholders. This is commonly referred to as “double taxation.” The IRS describes this as corporate profit being taxed to the corporation when earned and then taxed to shareholders when distributed as dividends.
Potential Advantages of a C corporation
- Shareholders are generally not personally responsible for the debts and liabilities of the business.
- C corporations may have an unlimited number of shareholders.
- Ownership may be transferred through the sale or transfer of stock, subject to any applicable agreements, securities laws, and corporate restrictions.
- C corporations generally have perpetual existence, meaning the corporation can continue beyond the death, withdrawal, or incapacity of its owners.
- Additional capital may be raised by issuing or selling shares of stock, subject to applicable laws and corporate approvals.
- Some customers, vendors, lenders, and investors may view a corporation as a more formal or established business structure than a sole proprietorship or general partnership.
- Certain business expenses may be deductible by the corporation, subject to applicable tax rules.
- A C corporation may be preferable for businesses seeking outside investors, multiple classes of stock, or a structure that is not limited by the shareholder restrictions applicable to S corporations.
To form a C corporation, formation documents, typically called Articles of Incorporation or a Certificate of Incorporation, must be filed with the appropriate state filing office, and the required state filing fees must be paid. The corporation may also need to adopt bylaws, appoint directors and officers, issue shares, obtain an EIN, maintain corporate records, and comply with ongoing state and federal filing requirements.
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