C Corporation

Definition

A C Corporation is a legal entity that is separate from its owners, providing limited liability protection to its shareholders while allowing for an unlimited number of stockholders. This structure allows corporations to raise capital by issuing shares of stock and is subject to corporate income tax, which is distinct from the individual tax rates of its shareholders. C Corporations can also retain earnings and are often favored by larger businesses due to their ability to offer employee benefits and attract investment.

5 Must Know Facts For Your Next Test

1. C Corporations are taxed separately from their owners, meaning they pay corporate income tax on profits before any distributions to shareholders are taxed again as dividends.
2. They can have an unlimited number of shareholders, making them ideal for large businesses looking to raise significant capital through public or private offerings.
3. C Corporations can deduct certain business expenses, which can reduce their taxable income and overall tax liability.
4. These entities are required to hold annual meetings and maintain detailed records of corporate activities, ensuring transparency and accountability.
5. In contrast to S Corporations, C Corporations can have different classes of stock, allowing for varied voting rights and dividend distributions among shareholders.

Review Questions

• How does a C Corporation differ from other business structures in terms of liability and taxation?
  • A C Corporation provides limited liability protection to its shareholders, meaning that their personal assets are protected from business debts and liabilities. In terms of taxation, C Corporations are subject to corporate income tax on their profits, whereas other structures like sole proprietorships or partnerships pass income directly to owners who then pay personal income tax. This dual taxation is a defining feature of C Corporations compared to other business forms.
• Discuss the advantages and disadvantages of operating as a C Corporation compared to an S Corporation.
  • C Corporations offer several advantages, such as the ability to have unlimited shareholders and multiple classes of stock, which is beneficial for raising capital. However, they face the disadvantage of double taxation on profits—first at the corporate level and then at the individual level when dividends are distributed. In contrast, S Corporations avoid double taxation as profits pass through directly to shareholders but are limited in terms of the number of shareholders and types of stock they can issue.
• Evaluate the impact of a C Corporation's ability to issue multiple classes of stock on investor attraction and corporate governance.
  • The ability of a C Corporation to issue multiple classes of stock significantly enhances its attractiveness to investors, as it allows for tailored investment opportunities with varying levels of risk and reward. This flexibility can enable a company to raise capital more effectively by appealing to different types of investors who may seek varying levels of control or financial return. Additionally, this structure can influence corporate governance by creating distinct voting rights among shareholder classes, potentially impacting decision-making processes within the corporation.

Related terms

Limited Liability: A legal structure that protects the personal assets of owners from being used to satisfy business debts and liabilities.

S Corporation: A type of corporation that meets specific Internal Revenue Code requirements and allows income to be passed through to shareholders without being subject to corporate income tax.

Shareholder: An individual or entity that owns shares in a corporation, providing them with rights to vote on corporate matters and receive dividends.