Currently, the most common business structure in the United States is known as a C corporation or “C Corps.”
A C Corp is an independent legal entity, meaning that it has its own tax identification number and can enter into contracts and other agreements with individuals, organizations (like other companies), and government agencies (such as states).
Some people might mistakenly think that C Corps are small businesses, but there is no size limit on the number of shareholders a corporation can have. The largest publicly traded companies in America are C Corps.
Alternatively, it is possible for a very large company to be structured as an S corporation, but you won’t see huge corporations like Amazon or Apple being run this way.
Definition of C Corporations
C corporations is defined as “domestic” for tax purposes. A domestic corporation is one that has been incorporated under the laws in any state or territory within the United States (or organized under an applicable section of the tax code). It is also possible for a corporation to be “foreign” or “alien,” but this does not occur often and will never happen with an S Corp (which can only have US citizens as shareholders).
The difference between domestic vs. foreign has nothing to do with whether the business is located within U.S. borders, it simply refers to where the company was created under state law or federal law, respectively.
Taxation of C Corporations
The basic tax on C Corps is known as the corporate income tax (CIT). The CIT amount due each year for most corporations is determined by multiplying your business’s taxable income by a flat rate of 35%. In addition to the federal level, states also impose their own corporate taxes, and they usually vary in terms of how that is calculated relative to the federal government.
A dividend is defined as a distribution of money. When a corporation earns income that it has not yet paid taxes on (known as “accumulated earnings”), then those profits can be distributed to shareholders in the form of dividends.
Shareholders are taxed on the money they receive as a dividend at their individual income tax rates and not at the corporate rate.
Capital Gains Tax
Capital gains are profits that result from a sale of an asset (such as stock, real estate, etc). When a shareholder sells their shares in a corporation for more than they paid for them or less than they paid for them, then those earnings will be subject to capital gains taxes.
This is one area where C Corps can potentially have an advantage over S Corps and LLCs because C Corps don’t have any limitations on how long you can hold onto your stocks before being taxed at the normal income tax rates.
Advantages of C Corporations
The most common business structure in the United States is C Corporations. There are many reasons why this may be so, but here are some of the key benefits of a C Corp:
1. Limited Liability Protection. C Corps are separate legal entities, which means that the owners – shareholders- have limited liability. Shareholders cannot be held personally responsible for business obligations and debts.
2. Ability to Raise Capital. The ability to raise capital is one of the major reasons why businesses choose to incorporate it in the first place. Many types of investors and lenders may not be willing to come on board if your business does not have some type of legal structure protecting their investment/loan.
With a C Corp, you can authorize up to 1 million shares which would allow for easy public trading on exchanges like NASDAQ or NYSE (if desired). In addition, venture capitalists often require companies they invest in to go through this legal process.
3. Perpetual Existence. The life of a corporation is perpetual, meaning that it never “dies.” A C Corp will exist in perpetuity as long as there are shareholders or other entities that have an ownership interest.
Disadvantages of C Corporations
1. Double Taxation. The biggest issue with corporations is the fact that they are required to pay taxes twice – once on their income and then again on any dividends paid out. This can be a huge burden for businesses, especially if you experience years where your business isn’t profitable but still have to pay a tax bill.
2. Complexity of Corporate Structure. This can be a double-edged sword. While it is true that incorporating your business offers many benefits, the process itself may be complicated and time-consuming to get set up correctly.
For example, most C Corps will have shareholders agreements in place which are formal contracts between all owners – this should specify how shares are owned (numerically), voting rights, etc., but these documents must also be filed with state authorities for validation as well.
3. Compliance Requirements. Most small businesses won’t need to spend much time on tax compliance issues, but corporations do face more requirements than S corps or LLCs – this includes keeping extensive records and filing forms with the IRS on a regular basis, as well as mandatory annual meetings.