Definition
A C Corporation, also known as a “regular corporation,” is a legal entity that is separate and distinct from its owners, or shareholders. This form of corporation is taxed under Subchapter C of the Internal Revenue Code. C Corporations provide limited liability protection to their shareholders, meaning that the personal assets of the shareholders are generally protected from business liabilities and lawsuits.
Key Features:
- Separate Legal Entity: C Corporations are entities separate from their shareholders.
- Taxation: The corporation itself is taxed on its earnings, and shareholders are taxed again on dividends received (double taxation).
- Liability Protection: Shareholders’ personal assets are shielded from corporate liabilities.
- Perpetual Existence: C Corporations continue to exist even if ownership changes.
Examples
- Large Public Companies: Many publicly traded companies are organized as C Corporations due to the ability to issue unlimited shares and have shareholders worldwide.
- Private Corporations: Smaller businesses that anticipate rapid growth and seek venture capital might also choose a C Corporation structure to benefit from the limited liability and ease of ownership transfer.
- Startups Seeking Investment: Startups often favor C Corporations for the ability to attract investors.
Frequently Asked Questions
What are the tax implications of a C Corporation?
C Corporations face double taxation. The corporation pays taxes on its income, and shareholders also pay taxes on any dividends they receive.
What is the difference between a C Corporation and an S Corporation?
While both C and S Corporations offer limited liability protection, S Corporations (taxed under Subchapter S) allow income to pass through to shareholders to avoid double taxation, but they have restrictions on the number of shareholders and types of shareholders.
Can a C Corporation reinvest its profits without distributing them as dividends?
Yes, C Corporations can retain earnings within the company to reinvest in growth, purchase assets, or save for future use without distributing them to shareholders, which can mitigate double taxation concerns.
How do I form a C Corporation?
To form a C Corporation, you must file Articles of Incorporation with the state, create bylaws, appoint directors, and issue stock to initial shareholders.
What are the disadvantages of running a C Corporation?
The primary disadvantages include double taxation and more stringent regulatory requirements compared to other business structures.
Related Terms
- S Corporation: A corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
- LLC (Limited Liability Company): A business structure that provides limited liability protection without the double taxation typically associated with C Corporations.
- Double Taxation: A taxation principle referring to income taxes paid twice on the same source of earned income.
Online References
- IRS on C Corporations
- Investopedia on C Corporations
- Small Business Administration on C Corporations
Suggested Books for Further Studies
- “Corporate Finance For Dummies” by Michael Taillard
- “The Entrepreneur’s Guide to Law and Strategy” by Constance Bagley and Craig Dauchy
- “C Corporations: How to Form and Operate a C Corporation” by David J. Cartano
Fundamentals of C Corporation: Business Law Basics Quiz
### What is a key characteristic of C Corporations that provides a safety net for shareholders?
- [ ] Shared liability among shareholders
- [x] Limited liability protection
- [ ] Unlimited liability protection
- [ ] Liability protection only for managers
> **Explanation:** A key characteristic of C Corporations is limited liability protection, meaning shareholders are typically not personally liable for corporate debts and obligations.
### What tax principle applies to C Corporations and often doubles the tax burden on income?
- [x] Double Taxation
- [ ] Single Taxation
- [ ] Triple Taxation
- [ ] No Taxation
> **Explanation:** C Corporations face double taxation; the corporation is taxed on its earnings, and shareholders are also taxed on any dividends paid out.
### Upon whose laws must C Corporations comply to be legally structured?
- [ ] Local county laws
- [ ] Federal laws only
- [ ] International laws
- [x] State laws
> **Explanation:** C Corporations must be legally structured according to state laws, as they are incorporated within individual states.
### How does a C Corporation reinvest its earnings?
- [x] By retaining profits within the corporation
- [ ] By distributing them equally among shareholders
- [ ] By setting up a non-profit arm of the business
- [ ] By allocating funds only to government bonds
> **Explanation:** C Corporations can retain earnings within the company for reinvestment in growth, purchasing assets, or saving for future use.
### What must be filed with the state to form a C Corporation?
- [x] Articles of Incorporation
- [ ] Certificate of Liability
- [ ] Statement of Organization
- [ ] Memorandum of Understanding
> **Explanation:** To form a C Corporation, Articles of Incorporation must be filed with the state, creating the legal entity.
### What are C Corporations susceptible to regarding their financial gains?
- [x] Double taxation
- [ ] Tax exemptions
- [ ] Extra penalties
- [ ] Single taxation
> **Explanation:** C Corporations suffer from double taxation where income is taxed at the corporate level first and again at the shareholder level when dividends are distributed.
### Which business type often favors becoming a C Corporation for the sake of attracting investors?
- [ ] Family-owned businesses
- [ ] Sole proprietorships
- [ ] Small, local businesses
- [x] Startups seeking investment
> **Explanation:** Startups favor the C Corporation structure for its ability to issue stock and attract venture capital from investors.
### What dictates the longevity or existence of a C Corporation?
- [ ] The personal decision of shareholders
- [x] Perpetual existence by law
- [ ] The duration listed in a company's mission statement
- [ ] The approval of annual renewals by state authorities
> **Explanation:** C Corporations have perpetual existence by law, meaning they continue to exist even if ownership changes.
### What is one disadvantage commonly associated with C Corporations?
- [ ] Ease of ownership transfer
- [ ] Unlimited liability for shareholders
- [x] More stringent regulatory requirements
- [ ] Lack of ability to raise capital
> **Explanation:** One disadvantage is more stringent regulatory requirements compared to other business structures, adding to the complexity of managing a C Corporation.
### Can shareholders' personal assets be targeted to settle corporate debts in a C Corporation?
- [ ] Yes, shareholders are personally liable.
- [x] No, shareholders' personal assets are usually protected.
- [ ] Only if the shareholder owns more than 51% of the corporation.
- [ ] It depends on the number of shareholders.
> **Explanation:** Shareholders' personal assets are generally protected from corporate debts and obligations due to the limited liability protection offered by C Corporations.
Thank you for learning about C Corporations with us. Accountancy and corporate law are the foundations of successful business management and strategy!
