The term C corporation can have a few different meanings, depending on where you are legally located and operating your business. Generally speaking, a C corporation is a business entity which is formed, taxed, and treated under standard corporate law. It is separate from its owners, and liable for certain obligations such as taxes, debts, and contractual agreements with customers and employees.
The term C corporation also refers to the type of taxation for a business. Such corporations file their own annual tax returns, on a form known as Form 1120. Additionally, the taxable profits of the business are separately taxed as “corporate income tax”, and shareholders in the business will also pay tax on their profits when dividends are paid out. By contrast, an S corporation (or “small business corporation”) may not be taxed separately from its owners or shareholders.
What Are the Benefits of Forming a C Corporation?
When forming a C corporation, the business itself is recognized as a separate and distinct legal entity. This means that the corporation is liable for taxes, debts, and certain obligations; on the other hand, the corporation’s owners cannot be held liable for the debts, etc. This limited liability protects the owners from financial and legal risks since they are not personally responsible for any losses or debts that the corporation may incur.
C corporations also have the ability to raise large amounts of capital through the sale of public stock. Business owners and shareholders in a C Corporation can also benefit from the “double taxation” structure of the business, which can be advantageous to those who are shareholders of a C corporation. For example, when a C corporation pays dividends to its shareholders, those shareholders are only taxed once on the income – once when the corporation pays the dividends, and then a second time when they are reported on personal tax returns.
The protections and benefits of forming a C corporation are clear. With the greater flexibility that C corporations bring to business ownership, many business owners may prefer this type of entity structure for their ventures. It is important to research local laws and regulations to ensure that your business is compliant, as the legal requirements and implications of forming a C corporation might vary depending on the jurisdiction.