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There are advantages and disadvantages to forming a C corp. It’s crucial to put the right foundation in place for your business. At Padgett Advisors, we provide a wide range of tax, accounting, and business services to companies throughout the United States. In this article, our tax professionals provide a guide to C corporations.
A C corporation is a separate legal entity owned by shareholders, who elect a board of directors to oversee the management of the corporation. An LLC is a legal entity that can elect to be taxed as a corporation (as either a C corp or S corp). Without making an election to be taxed as a corporation, an LLC is taxed as a sole proprietorship or partnership if it has multiple members.
As a separate legal entity, a C corporation is required to file its own tax return and pay taxes on its profits. C corporations are subject to corporate income tax, which is a tax on the profits earned by the corporation, and the shareholders are taxed on dividends they receive from the corporation. The corporate tax rate varies depending on the amount of profit the corporation has made, with higher profits being taxed at a higher rate.
The C corp files Form 1120, which is the official federal tax form used by a domestic corporation to report its income, gains, losses, and other deductions/credits and to calculate its annual income tax liability. For calendar C corporations, the filing deadline for this form is April 15, but the corporation can file Form 7004 to be granted a six–month extension. Form 1120 is complicated and should be completed by an experienced tax professional.
A small business tax advisor who has experience with C corps can help you assess the advantages and disadvantages. Here is an overview of some of the most notable pros and cons of C corporations:
Strong Liability Protection (Advantage):
One of the main advantages of forming a C corporation is the strong liability protection it offers to its owners. As a separate legal entity, a C corporation shields its owners (called shareholders) from personal liability for the debts and obligations of the corporation.
Allows for Complex Ownership Structure (Advantage):
Another advantage of a C corporation is that it allows for a complex ownership structure. For example, C corporations can have multiple classes of stock, which can be useful for businesses that want to give certain shareholders more voting rights or a higher share of profits.
Easier to Raise Capital: (Advantage):
C corporations can also be a good choice for businesses that want to raise capital, as they can issue stocks to raise funds. This can be particularly useful for businesses that want to grow quickly or that need a lot of capital to get started.
Significant Start-Up and Maintenance Costs (Disadvantage):
One disadvantage of forming a C corporation is the significant start-up and maintenance costs. C corporations are required to follow more complex legal and reporting requirements than other business structures, which can be more costly than many other types of business structures.
“Double” Taxation (Disadvantage):
Another disadvantage of C corporations is that they are subject to double taxation. The corporation is taxed on its profits, and then the shareholders are taxed again on dividends they receive from the corporation. Unlike a pass-through entity, a C corp has its own tax liability.
No. A C corporation is not a pass-through entity like an S corporation or partnership. The C corporation itself is taxed on its earnings before distributing their profits to the shareholders in the form of dividends.
It depends on the size and complexity of the C corporation. A C corporation can be managed and structured in a number of different ways, including:
The specific management and structure of a C corporation will also depend on the needs and goals of the business, as well as the preferences of the owners and shareholders.
A number of different companies are formed and operated as C corporations. Generally, the C corp structure is required for larger companies who have significant growth potential. Some examples of businesses that may operate as a C corp include:
At Padgett Advisors, we have been leaders in providing reliable tax guidance for small and mid-sized businesses for more than 50 years. If you have questions about forming a C corp, we are here as a resource. Call us now or connect with us online to arrange your fully confidential, no-obligation consultation with a tax advisor. We provide nationwide tax services to C corps.
