A C-Corporation is the standard corporation most people are familiar with. It is owned by shareholders and is subject to federal securities laws with limited exceptions. The C-Corporation may not be ideal for owners of smaller businesses interested in limiting tax liabilities and retaining more personal control over the company’s operations. Limited liability companies and S-Corporations (corporations that qualify for pass through taxation) may be better options. If the intent is to seek major investment capital then a C-Corporation is probably the better choice. This is particularly so if the intent is to take the company public (selling shares of the company to the general public). Limitations on S-Corporations (only a single class of stock is allowed) and LLCs make these types of companies unappealing to venture capitalists. One of the primary advantages of the C-Corporation is the ability to issue different classes of stock.
In a C-Corporation, a board of directors is appointed that is required to hold annual meetings and keep minutes. Failure to maintain these and other corporate formalities puts shareholders’ limited liability at risk. To avoid having creditors and others “pierce the corporate veil”, many businesses hire outside companies or attorneys to manage corporate formalities. The C-Corporation is financed by its shareholders and/or outside investors, and has the potential to be a publicly traded company. The tax liabilities for C-Corporations and their shareholders are complex. C-Corporations pay taxes on their profits at the corporate tax rate and their owners are taxed on dividends, salaries and bonuses received (the dreaded double taxation). For companies that do not qualify for S-Corporation status, there are ways to limit this tax burden including salaries and bonuses to shareholders and the retention of earnings. However, there are limits to the amount of earnings a corporation can retain before facing penalties and on the amount of compensation the IRS considers reasonable. Contact San Diego Corporation Lawyer Donald R. Oder for a free consultation.