What is a C-Corporation?
A C-Corporation is the typical corporate structure. However, any company—limited liability companies, partnerships, and sole proprietorship—can elect to be taxed as a C-Corporation. Electing to be treated as a C-Corporation is essentially deciding how your entity will be taxed.
As a C-Corporation, the income is taxed on the profits of the corporation, and then that income is taxed a second time when it is realized by the owners. While most people don’t want to be taxed twice, there are certain advantages to electing to be treated as a C-Corporation.
The Pros of a C-Corporation
Like most entities, a C-Corporation is a separate legal entity with a separate legal identity from its owners and provides limited liability for its owners.
In C-Corporations there is also a separation between management and ownership. Typically, owners are shareholders who elect the Directors to manage the company. Also, there are generally no restrictions on who can hold and transfer shares.
In some cases, entities may be required to be a C-Corporation. For example, if a company is interested in foreign investors, or is started in the United States entirely by foreign individuals, they must elect to be taxed as a C-Corporation. Electing to be taxed otherwise, with pass-through taxation requires ownership by U.S. residents.
C-Corporations can also pay for health insurance coverage for their owners with no limit on deductions for such benefits. The owners receive these fringe benefits on a tax-free basis.
The Cons of a C-Corporation
The first, most obvious disadvantage is that the owners of the corporation are taxed twice, at the corporate and the personal level, on all the profits of the corporation. This double taxation makes C-Corporations unattractive to individuals who rely on such entities as their main source of income. However, of course, such companies can avoid double taxation by not distributing profits to their shareholders and, instead, reinvest their profits in the company to continue growing.
C-Corporations, when compared to other entities, have many stricter regulatory requirements to comply with. There is little flexibility in how the company can be structured. There are also strict corporate standards that must be met. Part of the stricter requirements are a result of the separation of ownership and management. The management has to stay responsible to the shareholders who elect them, while also doing what is in the best interest of the company. Thus, there are requirements for Board of Director meetings as well as Shareholder meetings.
Diligent notes are required at all of these meetings, so Directors and Shareholders remain accountable.