C Corporation

A C Corporation is taxed under Subchapter C of the Internal Revenue Code. As a legal entity (an artificial person), the C Corporation is separate and distinct from the stockholders ? the owners of the corporation. As a tax-paying entity, the C Corporation must pay taxes on its taxable income prior to making dividend distributions to stockholders. It may issue more than one type of stock and can have any number of stockholders.

Moderate legal costs are incurred in setting up a C corporation, and annual costs are incurred for stockholders meetings, tax return preparations, and preparing other yearly reports and summaries as needed for management and desired by stockholders. Public notice of the formation and continued operation of a corporation is required and is accomplished through filings with the Secretary of State's Office.

Limitations of the C Corporation:

Double taxation of corporate net income distributed to stockholders in the form of dividends is the most frequently cited disadvantage of the C corporation. As a corporate entity, C corporations must pay income tax on their net income prior to any distribution of dividends to stockholders, and the dividends are taxable to the stockholders resulting in double taxation of corporation income distributed to the stockholders. However, the effects of this limitation can be reduced when the stockholders are corporation employees and derive most of their income from salaries and wages paid by the corporation.

Other limitations of the C Corporation include:

• Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
• Conflicts or disagreements among the usually small group of stockholders in a small-scale entrepreneurship corporation may immobilize decision making.
• Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
• Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not participants in operations of the business, and that can result in their becoming a voting block that does not support needs and decisions believed desirable by managing stockholders.
• Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
• If the corporation owns appreciated assets and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

The corporate shield of limited liability may be lost:

• When corporate formalities are not followed ? that is, when director and shareholder meetings are not held and minutes of such meetings are not kept.
• When corporate assets are treated as personal assets ? for example, when a corporate vehicle is used for family vacation and the corporation is not reimbursed for the nonbusiness use.

When limited liability is lost, shareholders become personally liable for any corporate legal or financial obligations. In addition, if corporate income tax returns are audited, failure to observe corporate formalities or treating corporate assets as personal assets can result in loss of corporate income tax deductions and levying of penalties and interest on taxes assessed for previous years.