by Michael W.

Created on: July 21, 2009

C Corporations

A C Corporation, according to the Internal Revenue Service, is the most common and general type of corporation there is. The C Corporation title and status refers not only to the way the corporation is organized, but also to the general definition of how the business will be taxed. C Corporations are uniformly taxed under Sub chapter C of Chapter 1 of the Internal Revenue Code.

For your information, C Corporations, under federal income tax laws, are recognized as separate legal entities from their shareholders. This basically means that a C Corporation must pay federal income taxes on all of its annual profits. C Corporations report their annual profits by filing Form 1120 with the Internal Revenue Service and pay taxes on their reported income at the corporate level. In addition, if those profits are distributed to the corporation's shareholders, in the form of dividends, then those shareholders are subject to pay taxes on the dividends they have received at the individual income tax level. This situation is commonly referred to as "double" or "dual" taxation.

I know what you're thinking, and as scary as being taxed twice on the same income sounds, there are quite a few tax advantages to it, as well as ways around the situation if the company would prefer that. The most common way around the C Corporation's double tax standard, usually for smaller corporations, is by having the owners also work as the corporation's employees. As employees, they will receive salaries and bonuses as compensation for the work they perform for the corporation. The corporation can then deduct that compensation as a business expense. In smaller corporations, compensation to the owner-employees will normally eat up all the potential corporate profits and leave no taxable income for the corporation to pay taxes on.

Like I said before, there are quite a few tax advantages to becoming a C Corporation; however, most businesses choose this business structure for its limited personal liability characteristic. Because a C Corporation is recognized as a separate legal entity, it allows its shareholders to protect their personal assets from judgments against the company, as well as the misdeeds and bad judgment of their partners.

In order to become a C Corporation, a company must prepare Articles of Incorporation conforming to state law where it will be organized. Then, the company must file the articles with the proper state authorities and pay whatever fees are involved in doing so. Once this is done, the new C Corporation must hold an organizational meeting, in which the bylaws that will govern the company will be adopted and recorded. At this point, the entire incorporation process will be completed. In addition, any stock share certificates should also be distributed to each one of the shareholders, which will need to be recorded in a company stock ledger. Copies of the articles, bylaws, and the stock ledger should be kept together in a corporate record book.

When incorporating, C Corporation status is the standard default business structure and is therefore also referred to as a "regular" corporation. So, in conclusion, a C Corporation is basically a business structure that allows a company to become recognized as a separate taxable entity from its shareholders, offering those shareholders limited personal liability for the company's debts.

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