The next business form is a C corporation. Before defining a C corporation, it is helpful to define generally what a corporation is and does. A corporation is an intangible entity separate from the owners of its stock and it is invisible.
This is different from the corporation’s assets such as a building or the machinery used by a corporation. A corporation has artificial personhood and is allowed some of the privileges of a natural person. With those privileges come most of the same restrictions of a natural person.
Corporations are created by law and can be organized as for profit or not-for-profit. The C Corporation is one of popular for profit corporate forms. Named after subsection C of the Internal Revenue Code. C corporations traded on the stock market are also referred to as publicly help corporations.
Tax Standing-Owner-employees of C corporations are able to buy tax-deductible benefits for themselves. This is because corporate owners that work for the corporation are measured as employees of that same corporation. For example if the owners of a C corporation bought life insurance to cover themselves and their employees, the owners are able to deduct the amount of the entire premium from the taxable income.
Income Tax Deductions– C corporations are able to pay little to no income tax when expenses exceed income, or if there are tax credits, high salaries, and large items of depreciation.
Limited Liability– The owner of a corporation is not liable for any of the debts incurred by the corporation. Creditors are only able to make claims against the corporate assets and investments made by stockholders. New corporations are not given as much latitude on this matter, however. Debts can become the responsibility of the owner if the corporation defaults when it is new.
Longevity– C corporations do not have to technically dissolve when an owner desires to leave the business or dies. Corporations can continue through death, withdrawals and even bankruptcy. This allows corporations to have an unlimited life.
Ownership Transfer– Stockholders are completely free to legally transfer shares to anyone. This can be done without legal input or intrusion from any other owners of the corporation who also enjoy this flexibility.
Raising Capital– Corporations are able to issue stock to increase capital purposed for expanding the business. This has distinct advantages over depending solely on personal finances or the just the shared finances of a sole proprietorship and partnership respectively.
Double Taxation– Corporations that distribute earnings as dividends to stockholders can be subject to double taxation. Net earnings are the profits left to the corporation after paying taxes. When the net earnings are then given to the stockholder, that stockholder must report the dividends as taxable income. This means the profits are taxed once as earnings and then again as individual income.
Ownership Transfer– The same thing that makes this an advantage gives this trait of C corporations a disadvantage. There is a potential for problems to arise if a majority shareholder sells their shares to another person and the new person becomes the majority shareholder. The new shareholder may not want the company ran the same way the old one did and cause clashes in interest.
Regulations– Although corporations enjoy a pliability that is not afforded to sole proprietorships and partnerships, they do have to conform to more government rules and regulations. For example when incorporating a business states or municipalities assess a franchise tax, a real property income tax, and a personal property tax on corporations. The corporation also has to be authorized by these same entities to conduct its business.
To continue on to the next business form, S Corporations, click here.
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