What Is a C Corp? Definition, Pros & Cons, and Taxes

To establish a corporation, you file specific paperwork, called the Articles of Incorporation, with the state. The Internal Revenue Service (IRS) views corporations as individual entities. Additionally, corporations need an employer identification number (EIN) from the federal tax body.

• While a C corporation can have an unlimited number of shareholders, an S corporation can have no more than 100 shareholders.
• The shares are held privately from the remainder of the shareholders/public and their stock prices are not published.
• A certified benefit corporation, also known as a B corporation or B-corp, is a for-profit business structured to benefit society.
• C corporations are the most common type of corporation, versus S corporations or LLCs.
• For example, if a corporation is sued, the shareholders are not personally responsible for corporate debts or legal obligations — even if the corporation doesn’t have enough money in assets for repayment.
• To maintain this liability protection, both corporations and LLCs should always keep business and personal finances separate.

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For those unaware of the best course of action, it’s usually recommended to consult a business attorney to discuss business structure options. In this article, more of the specific benefits and advantages of incorporating a business are discussed below. If you need help with the advantages and disadvantages of a corporation, you can post your legal needs on UpCounsel’s marketplace.

Corporations Lack Business Confidentiality

Building a credible origin story that resonates with your customers means being able to define it, align it and prove it. Hiram Walker’s premium Club Whisky really took off after he moved an advantage of a corporation is that production to Canada in the late 19th century. So much so that he renamed it Canadian Club to capture the uniqueness of its origin and distinguish it from its American competitors.

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A corporation has most of the rights and obligations of an individual, such as being able to enter into contracts, hire employees, own assets, incur obligations, and pay taxes. The interests of shareholders are represented by a board of directors, which they elect. Deciding whether to incorporate is an important choice to make when starting your new business. Other types of business legal structures include sole proprietorships, partnerships, and limited liability companies. As with any legal structure, corporations have certain advantages and disadvantages.

Tax Considerations

Forming a nonprofit corporation is even more difficult because of the increased paperwork. Aside from meeting state requirements, nonprofit corporations must obtain a tax exempt status from the IRS, and simply applying for this status costs $750. Some states require that nonprofit corporations apply for tax exempt status at both the state and the federal level. If your company is already dealing with a lack of funds, paying the various fees needed to form a nonprofit corporation can be very difficult, if not impossible. Before discussing the advantages and disadvantages of a corporation, we must first understand what makes up a corporation. The simple definition of a corporation is a legal business entity that exchanges ownership of a company, also known as stock, through shares.

Advantages of Forming a Corporation

• Depending on the state where you form your corporation, you may spend up to $150 on filing fees, assuming you are filing directly with your Secretary of State.
• Also, a corporation is governed by a board of directors instead of an individual owner.
• However, S corporations may only have one class of stock and a maximum of 100 shareholders, all of whom must be U.S. citizens.
• These are different from smaller types of businesses such as sole proprietorships and partnerships in many ways.
• However, small business owners with a growth mindset consider setting up their new business as a corporation.

If an owner passes away or decides to sell their share of the company, the business will continue to exist. With the option of transferable ownership (with some restrictions for S Corps), owners can sell or pass shares to another person or business. If you’re a new small https://www.bookstime.com/ business owner, or you’ve just started considering becoming a corporation, it’s wise to seek direction from an attorney and a tax professional. Block Advisors also has information and tools to help you prepare yourself to make this important decision for your company.

• This allows longer continuity of C corporations beyond the life of the owners, which can include partial owners called shareholders.
• The furious pace of gen AI enterprise adoption over the past year portends seismic change for the global software sector.
• Include designation words such as “Limited,” “Incorporated,” “Corporation” or abbreviated versions in your corporation name.
• Corporations are perhaps the most credible business entity from the perspective of lenders and potential investors.
• Sam is the owner of a retail chain that has started to grow rapidly.

A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on a stock exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held. LLCs, on the other hand, don’t have an IRS tax classification of their own. Single-member LLCs are automatically taxed like sole proprietorships and multi-member LLCs are automatically taxed like partnerships. In either case, company profits pass through to the members, and the members pay income and self-employment taxes on their share.

It may still be difficult for new partnerships to find agreeable partners that share the same objectives and goals. Some corporations, such as charities and fraternal organizations, are nonprofit or not-for-profit. If a business doesn’t need to sell stock, an LLC can be a great option. It offers legal protection, but has pass-through taxation, meaning earnings are only taxed once.

Pros of a Limited Partnership

In some states, the LLC needs to be dissolved if a member leaves, with the remaining owners forming a new LLC if they wish. LLCs aren’t tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations. Choosing whether to incorporate will affect your business’ success or failure. Because so much depends on this choice, consulting a lawyer is a wise decision.