C Corporations

The C corporations are really the starting point for the use of a corporation as a form of business. The C Corporation existed much earlier than the S, and is the chosen mode of organization and operation for all large businesses in America today. This article examines the formation, the regulations and the advantages or disadvantages to the corporation form of organization. The definition of a corporation is an organized form of business in which the ownership of the business is held by stockholders, or shareholders-individuals who have purchased ownership shares in the business. The corporation is organized with a board of directors and officers. The board of directors is elected to make the business decisions that affect the overall business condition and financial health of the business. Officers are elected to oversee the day-to-day operations of the business. The advantages of operating a business as a C Corporation are first, that your liability is limited, second, it is a perpetual legal entity, and third, the C Corporation can raise money by selling shares of stock to corporate investors. What does all this really mean? The limited liability aspect works in this manner: you are only liable to the extent of your investment. If you've only invested $5000 in a business, you are only liable for the value of the investment or $5000. The fact that a corporation is a legal entity and is perpetual means that even if one officer, board director, or shareholder should die, the business continues, often quite successfully. The ability to raise money is perhaps one of the best advantages. Many times, a business will need to increase cash flow, or fund the purchase of new equipment; if you can sell shares in the business, you have a built in way to fund those needs. The most basic requirement for the formation of a corporation is simply the articles of incorporation, or the corporation charter. The articles of incorporation must be filed with the state government in which the corporation chooses to become an entity, and as soon as the corporation is formed, an organizational meeting is held to adopt the corporation bylaws; these are the rules established by the Board of Directors for the managing of the business. The responsibility for the overall management of the corporation is entrusted to the Board of Directors, who will then elect officers who are responsible for the day-to-day operations of the corporation. One of the greatest advantages to operating your business as a C Corporation is concerned with the liability of the individual shareholders. When you purchase stock in a corporation, you are only liable to the extent of your investment; nothing further. This is a true fact, unless there is a situation where the corporate "veil" is pierced. Then the liability of the shareholders guilty of piercing the veil will be questioned. What does this term "piercing the corporate veil" mean? It means you do not keep your personal finances separate from the corporation's finances. It looks like the guilty shareholder is using the corporation in personal ways, and this increases the liability of the shareholder in question. The great disadvantage is the "double taxation" of profits. Any profits shown by the corporation are taxed, and then any dividends paid to investors, are also taxed. The corporation receives no tax deduction for profits distributed to investors in the form of dividends, therefore there is a situation created for double taxation: the corporation is taxed on the profits, and when those profits are distributed to shareholders, they are taxed again. However, this is just a casualty of the situation: if you wish to have the business entity treated as a separate legal entity, it must also be treated as a separate taxable entity.