There are a number of options when it comes to business formation. American small businesses are often formed as sole proprietorships or partnerships. Limited liability company structures are also popular among smaller businesses. But businesses of every size may also be structured as corporations, and it’s important to understand the distinctions between different classifications. This article will deal help define what is a C Corporation and how it compares to other structures.
General Corporate Structure
When one hears the term “corporation” an image of a large, possibly multinational entity is conjured. However, it is important to distinguish legal structure from how corporations are generally perceived. The primary feature of a corporation is that it is a legally distinct entity. This means that, like an individual person, a corporation may be taxed, sued, file suit, transact business and enter into contracts. Other business structures are not generally considered to be distinct entities, which is a reality that sets a corporation of any size apart from other businesses.
The Difference Between C and S Corporations
There are two primary kinds of corporations: C corporations and S corporations. Both of these structures are legally distinct entities. As a result, they remain legally separated from their owners and managers in many ways. But there are important differences between C and S corporations.
First, the profits of C corporations are taxed distinctly. This means that taxation of the company’s profits does not affect taxation of its owners. Second, S corporations must pass on their profits to their shareholders before they are taxed. This means that while the profits of C corporations are taxed in ways that do not affect shareholders, shareholders in S corporations must pay taxes on profits in the company via their personal returns.
Pros and Cons of C Corporations
Like any business structure, it’s important to understand the pros and cons of a C Corporation. Unlike sole proprietorships, partnerships and limited liability companies, C corporations are owned by shareholders. As a result, the company must be governed and generally managed by a board of directors elected in order to make policies and major business decisions. It is worth noting that the specifics of C corporation operations are determined by the state(s) in which the corporation is incorporated. Therefore, C corporations headquartered in different states may be held to different standards and compelled to comply with different regulations. Oftentimes, C corporations are required to comply with reporting standards and to pay various fees associated with operating in their chosen state.
Advantages of the C corporation structure include limited liability for its owners, which means that they can neither be sued for corporate behavior nor held personally liable for any debts which the company may incur. In addition, certain costs of benefit can be written off as a business expense by C corporations and the company may be owned by an unlimited number of shareholders.
Business Formation Lawyers
If you are thinking about launching a startup, investing in a new business or simply have questions about business structure, please consider reaching out to the team at LawTrades. We have experience helping more than 5,000 startups with formation, compliance, financing and other pressing legal issues. And we would be glad to help you with any legal needs you or your company may have.