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What is a C corporation?
A C corporation (C corp) is a separate legal business entity from its owners and shareholders. The entity can possess its own property, enter into contracts, and be held responsible for its debt without involving personal assets.
C corp is statistically one of the most popular choices of business structures in the U.S., frequently executed by famous brands such as McDonald’s, Starbucks, Apple, Microsoft, Walmart, Target, Amazon, and more, thanks to its promising growth potential through unlimited stock sales.
The expression “C corporation” originates from the rules and regulations of subchapter C of the Internal Revenue Code, which these corporations are bound to strictly.
One of the most exciting aspects of a C corporation is that shareholders and investors can be foreign residents worldwide. Shareholders are granted certain rights to earnings distribution and the board members’ appointing procedure.
If you are planning to start your business in the U.S, take time to consider the following advantages of forming a C corporation to make the most well-suited decision.
- Limited liability protection
With this structure, the owners are protected against unfavorable events such as bankruptcy or litigation, and their liability risks are limited to the amount they invested in the company.
In a similar manner to C corporations, S Corporations can provide liability protection, but non-resident aliens are not permitted in the ownership structure. Here’s a helpful article from us for more details on the differences between these two structures. Feel free to browse our site for information.
- Easier to attract potential investors
There are no restrictions on the number or the nationality of shareholders in a C corp, presenting an opportunity to attract investments not easily accessible in other kinds of structures, as well as increased chances of raising capital through stock sales.
- Long-lasting stability & growth
Unlike partnerships and sole proprietorships, a C corp’s existence continues even if the owner passes away or transfers their share to another entity. Owners have the right to transfer ownership of the company to outside investors whenever they need to sell the business.
C corporations possess more credibility than sole proprietorships or partnerships, creating a more professional appeal to clients and investors.
- Charity & donation deduction
The total amount of charitable contributions and donations can be deducted from corporate tax returns. Generally, the grants claimed are not allowed to exceed 10% of the company’s taxable income. Yet at the moment, C corporations are permitted to set a charitable cash contribution limit of 25% of taxable income during the calendar year 2021 under the condition that they select the increased corporate limit on a contribution-by-contribution basis.
If you’re still contemplating, don’t hesitate to revise the overall positives and negatives of a C corporation to make better decisions.
As many upsides as this structure offer, there are several disadvantages you should be mindful of before elaborating on the idea of running a C Corporation.
- Strict regulations and complex paperwork
C Corporations are subject to complex tax regulations and extensive formalities such as holding annual shareholders’ meetings, accounting, auditing, etc. The required paperwork for C Corp is also substantial, including bookkeeping and filing necessary documents such as articles, annual reports, and more.
- Cost burdens for Start-ups
A variety of fees, including the Article of the Incorporation filing fee, will be required to establish this type of corporation. Owners will have to pay the filing, legal, licensing, and some tax fees. Unlike S corporations, C corporations’ shareholders are not eligible for qualified business income deductions.
- Double taxation
The profit is taxed twice; once at the company level and once at the shareholder level. A C corp must first file a federal return (Form 1120) with the IRS to pay corporate income tax. After that, shareholders must pay personal income tax upon receiving dividends or selling stocks. C corp is now subject to a flat 21% business tax rate at the federal level. However, taxes can be deducted by distributing additional profits from the corporation as salaries or bonuses at the end of the year.
Try our US Business Entity Selection Tool questionnaire to see if your goals are aligning with the C corporation structure!
What to keep in mind when forming your C corp
Upon deciding to launch your C corporation, what are the next steps to ensure a healthy and successful business? Is forming a C corporation fitting with your expectations?
Who should be forming a C corp?
C corporations are much less restricted in terms of the owner’s residency, citizenship, and other legal requirements than other business structures. In any case, it is recommended that you choose this model if you are:
- Running a company rather big in scale (since the launching expense is high as well)
- Looking for funding through investors (large investors prefer C corporations because their income is taxed at the corporate level, hence they are less liable to tax and filing requirements)
- Aiming for special rights, regarding dividends and voting rights
- Working with international partners or engaging in overseas sales (no limit on shareholders)
- Having more than 100 shareholders
- Planning to sell the business or transfer ownership in the future
Making the right choice of form depends on carefully considering your goal. The tax treatment policy is layered and complex, so do be sure to take your time and consult local experts for a better understanding.
When is the best time to form a C corp?
It is advised to form a corporation as soon as possible, before signing a contract, hiring employees, and adding partners, and co-owners to benefit completely from liability protection. That said, you will need to prepare financially and legally before forming your enterprise. For guidance on the appropriate time, seek help from local experts according to your organization’s actual condition.
A step-to-step guideline to forming a C corp
Once confirmed that this entity structure is aligned with your vision, it’s time to understand how to form a C corporation.
Conveniently, BBCIncorp has already covered the essential steps for you:
Step 1: Decide on a name for your C corporation
Step 2: Appoint a Registered Agent
Step 3: Draft your articles of incorporation
Or you can discover our complete process of forming a C corporation. To be precise, you don’t actually “become” or “form” a C corporation. Unless you qualify for Subchapter S and elect it, your corporation will be taxed under Subchapter C after incorporation.
C corporation is currently one of the most common corporate structures in America. This is a pleasant outcome of its various and diverse advantages as a business model. Entrepreneurs aiming toward a more complex and challenging ownership structure with unlimited shareholders/ investors all around the globe might find this model beneficial in the long run.
As always, BBCIncorp will continuously update the latest information and policies regarding these business entities on our sites. Whenever you have an unanswered question, feel free to chat with us directly on the chatbox or send us an email at email@example.com. We are pleased to offer our help!
Frequently Asked Questions
In the case of Delaware, what are the differences between an S Corp and a C corp?
A few noticeable differences between the two are
- Incorporation Process (you are required to file additional documentation to become an S Corp for federal tax purposes)
- Taxation (C corps are under the influence of double taxation)
- Ownership (C corps have unlimited shareholders while S Corps can have at most 100, not to mention other complex requirements)
Read more about C corp and S corp’s characteristics
How do I convert from LLC to C corp in Delaware?
Firstly, you should start by working your way to receiving approval from everyone involved for the conversion decision. A meeting is expected to happen for official confirmation. Afterward, you should be prepared to file a Certificate of Incorporation and Certificate of Conversion to the Secretary of State. Once approved by the State, you shall direct the attention to administrative matters and satisfy the essential requirements.
The full instructions on converting from an LLC to C corp in Delaware
Can I convert my S Corp into a C corp?
The answer is Yes. As soon as the majority of shareholders consent, the Subchapter S status election can be officially revoked by submitting a statement at the service center where your annual return is filed. Please be advised that you must be absolutely certain about the conversion before beginning this long-term procedure. Unwanted tax consequences are likely to happen due to the changes.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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