Advantages and Disadvantages of C Corporations

The most common type of corporation is the C Corporation, which is a for-profit, state-incorporated business. Articles of Incorporation are filed and appropriate fees are paid to set it up.

The C corporation is established as a unique business entity, which takes on a distinctly separate business and tax identity from that of the owners (the shareholders). Separate income taxes are filed (IRS form 1120), and corporate taxes are paid regularly for the business. In return, the business owners are removed from personal liability for debt incurred by the corporation.

Should the business go bankrupt, or be faced with a lawsuit, the owner’s personal assets are protected. This is the most significant reason why many business owners choose to incorporate. Additionally, as a separate entity, a corporation can own property, make business deals, or even sue another business independently of the shareholders.

To establish a corporation, several requirements and formalities must be addressed. For example, a corporation must issue shares to stockholders. In addition, state requirements usually include minutes be taken at shareholder and Board of Director meetings, officer appointments, and specific records maintained, as outlined by the state in which the incorporation documents are filed.

The shareholders have ownership in the corporation, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Corporations must adhere to corporate tax laws and file corporate taxes regularly. While corporate taxes can be higher, initially they may be lower than that of a sole proprietor who is paying a 28 percent rate on his or her personal income tax. The first $50,000 is taxed at a rate of 15 percent.