X-Banker

C Corporation Information

What is a C Corporation?

A C Corporation (otherwise known as a “C Corp”) is a general corporation located in the United States that is taxed in a very precise manner under the specifications of the Internal Revenue Code. For federal income tax purposes, the majority of large companies are treated as C Corps, considered the premier entity for going public and attracting investors. Forming a C Corp creates a separate legal structure, which benefits business owners by shielding their personal assets from any future judgments against the business. A C Corporation allows you the option of splitting profits and losses between company owners and the business to possibly lower the overall tax rate.

Of particular note, C Corporations can have an unlimited number of shareholders from across the globe and can have several different classes of shares. If your C Corporation is located in the states of Nevada or Wyoming, your officers and directors can reside anywhere in the world; plus, nominees or stand-ins can be utilized when necessary for extra levels of privacy. Also important, C Corporporations are characterized as perpetual existence, which means that the company continues on when the business owner leaves or dies.

Big Bottom-Line Benefits

Offering the widest range of deductions and expenses currently allowed by the IRS, a C Corp provides your business with a number of benefits that impact your bottom line. Consider that as a C Corporation, not only can you can deduct ordinary business expenses, but you can also set up employee benefits, such as medical reimbursement, and deduct the costs of running these programs, including all paid premiums. Your employees, including shareholders, will not be required to pay taxes on the value of these benefits.

You may be wondering whether this differs from an S Corp, LLC or LP. Indeed, it differs greatly. If your corporation is structured as one of those business entities, you can write off the costs of employee benefits, but any employee or shareholder (including you, the owner) who has more than 2% ownership in the entity will be required to pay taxes on the value of the benefits received. Choose a C Corporation if you want the maximum tax deductions and prefer employee fringe benefits on a tax-free basis.

Talking About Taxation

Double taxation is most often cited as the number-one disadvantage of forming a C Corp. It happens when your C Corporation has already paid taxes on profits left over at the end of the year and then distributes the profits to shareholders, who must declare the received dividends as income on their personal tax returns, thereby taking a double tax hit.

There are a number of ways that you can avoid dual taxation. The simplest solution may be structuring your C Corp so that no profits remain left over at year’s end. You can do this by using all the write-offs and deductions allowed by the IRS to reduce your C Corp’s net income. Also consider paying higher salaries to yourself and other employees. You’ll have to pay both payroll and personal income taxes, but keep in mind that you would have to pay personal taxes on dividends paid to you regardless. Speak with a CPA about whether the savings outweigh any additional taxes required.

To C or Not to C

C Corps are ideal for any business that sells products, has a storefront staffed by employees and has a warehouse for storing inventory. Due to the tax treatment on the sale of assets, C Corporations don’t work well for businesses that hold appreciating assets, such as real estate.

Whether you choose to form a C Corporation largely hinges on taxation, which is why it’s wise to seek the advice of a trusted CPA before making a final decision.

Steps for Forming a C Corp

Following the correct steps is critical to forming a C Corporation. First, you’ll need to choose an available business name for your C Corporation that complies with corporation rules set forth by the state in which your business resides. The next steps involve appointing a board of directors and meeting with them, filing the articles of incorporation, establishing corporate bylaws, issuing stock certificates and obtaining any required licenses or permits for conducting business as a C Corp.