A C corporation is any business organized and bound by the rules of Subchapter C of the Internal Revenue Code and files an income tax form 1120. A C corporation is an intangible entity separate from the owners of its stock and it is invisible. C corporations are created by law and can be organized as for profit or not-for-profit making it a very popular business form.
A corporation has artificial personhood and is allowed some of the privileges of a natural person. Those privileges also come with responsibilities that the C corporation must remain separate from its owners. If separation is not maintained, then the owners of a C corporation can be held liable for the debts or the actions of the corporation. Below are a few of the pros and cons of owning a C corporation.
ADVANTAGES
Tax Standing-Owner-employees of C corporations are able to buy tax-deductible benefits for themselves. This is because corporate owners that work for the corporation are measured as employees of that same corporation. For example, if the owners of a C corporation bought life insurance to cover themselves and their employees, the owners are able to deduct the amount of the entire premium from the taxable income.
Income Tax Deductions– C corporations can pay little to no income tax when expenses exceed income, or if there are tax credits, high salaries, and large items of depreciation. If the corporation shows a net loss for a year, that loss can be carried forward or backward to offset income in another period.
Limited Liability– The owner of a corporation is not liable for any of the debts incurred by the corporation. Creditors are only able to make claims against the corporate assets and investments made by stockholders. New corporations are not given as much latitude on this matter, however. Debts can become the responsibility of the owner if the corporation defaults when it is new.
Longevity– C corporations do not have to technically dissolve when an owner desires to leave the business or dies. Corporations can continue through death, withdrawals and even bankruptcy. This allows corporations to have an unlimited life.
Ownership Transfer– Stockholders are completely free to legally transfer shares to anyone. This can be done without legal input or intrusion from any other owners of the corporation who also enjoy this flexibility.
Raising Capital– Corporations can issue stock to increase capital purposed for expanding the business. This has distinct advantages over depending solely on personal finances or the just the shared finances of a sole proprietorship and partnership respectively.
DISADVANTAGES
Double Taxation– Corporations that distribute earnings as dividends to stockholders can be subject to double taxation. Net earnings are the profits left to the corporation after paying taxes. When the net earnings are then given to the stockholder, that stockholder must report the dividends as taxable income. This means the profits are taxed once as earnings and then again as individual income.
Ownership Transfer– The same thing that makes this an advantage gives this trait of C corporations a disadvantage. There is a potential for problems to arise if a majority shareholder sells their shares to another person and the new person becomes the majority shareholder. The new shareholder may not want the company ran the same way the old one did and cause clashes in interest.
Regulations– Although corporations enjoy a pliability that is not afforded to sole proprietorships and partnerships, they do have to conform to more government rules and regulations. For example, when incorporating a business states or municipalities assess a franchise tax, a real property income tax, and a personal property tax on corporations. The corporation also must be authorized by these same entities to conduct its business.
TAX AND FILING RESPONSIBILITIES
As with every business there are filing and tax responsibilities that come along with owning a C Corporation. As a C corporation you may be responsible for the following types of taxes:
Income Tax – This is a tax on the net income that a corporation earns over a specified period, typically a year.
Estimated Tax – a C corporation must pay estimated taxes when the expected estimated tax will be greater than $500.
Employment Taxes – These are the payroll taxes of Social Security, Medicaid, Federal Unemployment and State Unemployment.
Excise Taxes – These taxes are paid on specific goods and are usually included in the price of the product. Gasoline is a product that has excise taxes included. These taxes can be levied by the federal and state governments.
