A C Corporation is a legal entity that is taxed under Subchapter C of the Internal Revenue Code. Unlike S Corporations, which pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes, C Corporations are separate tax entities from their owners. This means that income generated by a C Corporation is taxed at the corporate level, and any dividends distributed to shareholders are taxed again at the individual level, leading to double taxation.
Structural Attributes
A C Corporation can have an unlimited number of shareholders, including foreign shareholders. This type of corporate structure also allows for multiple classes of stock, offering greater flexibility in raising capital.
Key Characteristics
- Separate Legal Entity: A C Corporation is legally distinct from its shareholders.
- Limited Liability Protection: Shareholders are protected from personal liability for corporate debts and obligations.
- Double Taxation: Earnings are taxed at both the corporate level and the individual level when dividends are paid out.
- Perpetual Existence: The corporation continues to exist even if ownership or management changes.
Comparison with S Corporation
Taxation
While C Corporations face double taxation, S Corporations avoid it by passing income directly to shareholders, who then report it on their personal tax returns. However, S Corporations are limited to 100 shareholders and can only issue one class of stock.
Formation and Ownership
C Corporations can have unlimited shareholders and various classes of stock, making them suitable for larger, publicly traded companies. In contrast, S Corporations are restricted to fewer, domestic shareholders and a single class of stock, catering more to smaller, privately-held companies.
Special Considerations
- Formation Costs: C Corporations can be more expensive to form because they require formal records, including bylaws, articles of incorporation, and organizational meetings.
- Compliance: C Corporations face stringent regulatory requirements, including periodic filings and corporate formalities.
- Potential for Growth: The structure allows for the raising of capital through public markets, facilitating significant growth opportunities.
Examples
- Apple Inc.: As a publicly traded company, Apple is a prime example of a C Corporation.
- Microsoft Corporation: Another high-profile C Corporation, illustrating the suitability of this structure for large, multinational companies.
Historical Context
The concept of the C Corporation has evolved through various tax reforms and regulations aimed at balancing the benefits of incorporation with the need for fair taxation. The Subchapter C designation came into prominence with the Internal Revenue Code of 1954, which streamlined corporate tax regulations.
Applicability
C Corporations are best suited for businesses intending to raise substantial capital, possibly through public stock offerings. They’re ideal for scalable businesses with ambitions of significant growth and expansion.
Related Terms
- S Corporation: A special designation allowing corporations to avoid double taxation by passing income directly to shareholders.
- LLC (Limited Liability Company): A flexible hybrid entity that combines the pass-through taxation of partnerships with the limited liability of corporations.
- Corporate Tax Rate: The percentage of a corporation’s profits that is paid as tax to the federal government.
FAQs
What are the benefits of a C Corporation?
How is double taxation handled in a C Corporation?
Can C Corporations choose to become an S Corporation?
References
- Internal Revenue Code, Subchapter C
- IRS Publication 542, Corporations
- “Taxation of Business Entities” by James R. Repetti, Diane M. Ring, and Samuel C. Thompson, Jr.
Summary
A C Corporation is a business entity taxed under Subchapter C of the Internal Revenue Code. Known for its ability to raise capital through various classes of stock and unlimited shareholders, it offers substantial growth potential but comes with the caveat of double taxation. Companies such as Apple Inc. and Microsoft Corporation exemplify the successful implementation of this corporate structure, making it a preferred choice for large-scale enterprises.
