This is an excerpt from our free downloadable guide on incorporation and business entity types. Download the full guide here.
Previously, we looked at the LLC entity type, a common choice among small business entrepreneurs. This week, we examine the C Corporation.
A C Corporation (also referred to simply as a corporation) is the most common corporate structure, especially for large companies. Like the LLC, a corporation must be created by the state, and offers protection to its owners, while also incurring obligations from the business to the state in the form of compliance and annual maintenance activities. The C Corporation is especially notable for its unique tax requirements, with double taxation on corporate profits.
You Should Also Read: S Corporation — Pros and Cons
- Limited liability. Corporations offer limited liability to their owners. Shareholders are only liable to the amount of their investment in the company; personal assets of shareholders are protected.
- Issuing stock. Corporations can issue stock to raise money from investors. The company can have an unlimited number of owners, and ownership is easily transferred by selling shares of stock. Because ownership is defined by
shareholders, the business has unlimited life, continuing to exist and run no matter what happens to any individual owner, director, or even founder. Corporations can also have multiple classes of stock, with more voting rights for certain classes.
- Double taxation. Corporate profits are subject to double taxation. Unlike the pass-through entities, corporations are taxed as a separate entity, subject to corporate income tax. Then if the corporation distributes those profits as dividends, shareholders pay a second tax when they report the income on their personal returns.
- Formation, maintenance, and compliance requirements. Unlike the simpler entity types, corporations must be created by the state, by filing a document known as either a Certificate of Incorporation or the Articles of Incorporation and paying a filing fee. Each year the corporation must pay a fee to maintain its status, and file annual reports. There are also important compliance rules, including mandatory director and shareholder meetings, with rules about notification and documentation, corporate minutes requirements, and procedures for how shareholders, directors, and officers operate the company. If procedures are not followed, then the corporation runs the risk of piercing the corporate veil.