In the United States, both large and small firms frequently use the C-corporation, sometimes known as the C-corp. It has legal status independent of its owners, which permits it to engage in business dealings, bring legal actions, and amass property. One of the key benefits of a C-corp is that it provides its owners with limited liability protection, meaning they are not held personally accountable for the debts and obligations of the corporation. C-corp has a number of drawbacks, therefore it’s not always the ideal option for small firms.
The fact that C-corps are liable to double taxation is one of their key disadvantages. This implies that the profits of the business are subject to tax both when they are received by the corporation and when they are dispersed to the shareholders as dividends. Owners of C-corporations may have a heavier tax burden as a result than owners of S-corporations or LLCs. The fact that C-corp is subject to stricter rules and formalities, such as having frequent meetings, maintaining thorough records, and submitting yearly reports, is still another drawback.
Some small firms may nevertheless decide to set up a C-corp despite these drawbacks for a variety of reasons. For instance, companies that want to go public or obtain sizable amounts of capital from investors could find C-corp more appealing. C-corps also allow for an unlimited number of shareholders and various stock classes, which gives them more ownership flexibility.
C-corp is able to pay its owners in a variety of ways, including through salaries, bonuses, and stock options. Dividends from the corporation’s profits may also be paid to the owners, or shareholders, albeit there may be a possibility of double taxation. Selling shares to other investors or the company itself is another avenue for C-corp owners to receive payment.
C-corp is not always the greatest option, but it can be a feasible one for small firms. Before deciding to form a C-corp, small business owners should carefully weigh the benefits and drawbacks of doing so. A tax expert or an attorney should be consulted as well to make sure the business structure suits the needs and objectives of the company. The federal income tax rate for C Corporations in 2020 is 21%, while state taxes may be different.
Limited liability protection for owners, the capacity to raise money through the sale of shares, and potential tax advantages are all perks of a C corporation. Double taxation on profits, intricate legal and tax requirements, and higher administrative costs in comparison to other corporate forms are all drawbacks.