What is a C Corporation?

'C Corporation' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

C Corporations refers to the primary subchapter under which American businesses decide to incorporate themselves in order to restrict the total financial and legal liabilities of the owners. Such C Corporations prove to be the principle alternatives to S Corporations, whose profits are able to pass directly through to the owners and so only become taxable on the individual level. Limited liability companies are the other main choice to the C corporations. They deliver all of the legal safeties of corporations yet become tax treated as if they were sole proprietorships.

Unfortunately for C Corporations, they do suffer the effects of double taxation. Yet they do also permit the businesses to reinvest their profits back into the firm with a lower corporate tax rate penalty. The majority of incorporated companies within the United States turn out to be C Corporations.

Organizing a corporation starts with the new owners selecting the new entity’s name (and in many states registering or reserving it with the secretary of state) of the new business enterprise. The owners must draft up the articles of incorporation and file them with the appropriate state business department. The first shareholders will then be issued their stock certificates once the business is established. Every C Corporation has to first file the Form SS-4 in order to get their EIN employer identification number. Every jurisdiction has its own varying requirements for these obligations, yet the corporations generally must file income, state, payroll, disability, and unemployment taxes for their employees.

Such C Corporations must hold minimally one meeting per year for the benefit of both the directors and the shareholders. These must have meeting minutes kept in order to transparently display the ways and means in which the business functions. There will have to be voting records maintained of the company directors as well as a full list of all owners’ names and their ownership percentages in the firm. The company bylaws are required to be kept on the business headquarter premises at all times. Such enterprises also have to file all necessary financial disclosure reports, annual reports, and relevant financial statements with the SEC.

There are many benefits to such C Corporations. Most importantly for owners, they first limit the liability of all shareholders, directors, officers, and employees. It is not possible for the legal and debt obligations from the company to transfer over to one or more individuals under this type of corporate structuring. Even if each of the company owners become changed out, the corporation continues its existence. There is no limit to the numbers of shareholders and owners with this kind of corporation either as there would be with an S Corporation. Yet these must be registered properly with the SEC Securities and Exchange Commission once they reach a certain number of shareholders.

The primary downside to the C corporations centers on the idea of double taxation. As the firm generates its income, it will have to file a corporate tax return with the IRS Internal Revenue Service. Once the appropriate business expenses (including salaries) have been deducted from the gross income, the rest becomes subjected to corporate income taxes. Much of the remaining net income will then be distributed out to shareholders in what is called dividends. The income to the shareholders must be reported on the recipients’ tax returns. This means that the C Corporation profits are being twice taxed, once at the corporate tax rate level and a second on the individuals’ tax rate level. That income which is retained earnings will avoid double taxation only. It helps to explain why mega corporations like Apple hold on to billions of dollars in retained earnings routinely.

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The term 'C Corporation' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.