What Is A C Corporation And Why Is It Common In The U.S.?

As of today, the number of businesses and corporations in the United States has exceeded 33 million (including sole proprietorships, partnerships, limited liability companies, and corporations). It’s estimated that at least 4 million new companies are joining the industry annually, making the competition undeniably high. Nevertheless, starting a successful business in the U.S. remains undeniably attractive to entrepreneurs, especially in the structure of a C corporation.

Why is the C corporation model common in the U.S. and what does it guarantee in the long run for your business? In this article, we will be looking into the definition and details of this entity structure to give you a deeper understanding of the matter.

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.

Benefits

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.

• Credibility

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.

Drawbacks

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.

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.

Summary

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 service@bbcincorp.com. We are pleased to offer our help!