What is a C Corporation? | IASourceLinkSophie Troxell
What is a C Corporation?
A C corporation, or C-corp, is a type of legal business entity. The difference between a C corporation and other types of entities is that the owner or shareholders of a C corporation are taxed separately from the entity. The C corporation is also taxed on corporate income, creating a double taxation situation.
C corporations are the most common type of corporation and can be compared to S corporations and limited liability companies — which also keep company assets and owner assets separate. What makes them different is the type of legal structure and tax treatment.
Advantages of a C Corporation
Investors and owners aren’t taking as much of a risk being part of a C corporation. Since their assets are kept separate from the business, they can only lose the amount they have invested. If the business fails, shareholders’ personal assets cannot be taken. Because of this setup, C corporations also have the most growth potential as there is no limit to the number of stocks a shareholder can have, or the number of shareholders involved. Note that once you have $10 million in assets and 500 shareholders, you’ll need to register with the SEC under the Securities Exchange Act of 1934.
Even though double taxation isn’t ideal, individuals can invest profits back into the business at a lower corporate tax rate. There’s also the opportunity to deduct business expenses. Both of those aspects are a definite advantage.
Disadvantages of a C Corporation
In short, there are more regulations and setup fees.
C corporations are required to hold annual meetings, have a board of directors, and have shareholders vote on who holds positions on the board.
Even further, they must keep minutes on the meetings and keep voting records, along with a list of the owners’ names and percentage ownership in the company.
The corporation must have bylaws on the premises of the primary business location.
Annual reports, financial disclosure reports, and financial statements are required to be filed, as well.
As said above, C corporations create a situation of double taxation — a tax on corporate earnings and tax on personal dividends. Corporate earnings are taxed first and the remaining amount is distributed to shareholders. Then, those individual shareholders pay personal income taxes on the dividends they received. It’s also not possible to deduct corporate losses on personal tax returns like you can with an S corporation.
Comparing C Corporations to S Corporations
Let’s look at these two business entities head-to-head: S corp vs C corp. They’re very similar, which can cause confusion about which is the best for your business. They both offer limited liability protection, require you to file Articles of Incorporation, and have shareholders, directors, and officers. The differences come in the form of taxation and ownership. C corporations are taxed both corporately and individually, while S corporations allow you to pass taxes through the corporate level to shareholders.
The second major difference lies in the number of shareholders allowed. C corporations carry no restrictions on the number of shareholders or who qualifies for ownership, while S corporations cannot have more than 100 shareholders and those shareholders cannot include C corporations, other S corporations, LLCs, or partnerships.
How to register
C corporations require a more lengthy registration process than other types of legal entities. If you choose the C corporation route, you will need to register under an available business name and file articles of incorporation with the Iowa Secretary of State. Once the business is certified, stock can be issued to shareholders.
Also on your list will be to file Form SS-4, which qualifies you for an employer identification number, or EIN.
For more advice and business structure comparisons, view our comprehensive guide on how to start a business in Iowa. If questions come up along the way, our team is here to help. The live chat feature in the bottom right corner of the page is a great way to get help quickly and easily.