One of the primary advantages of the C-Corporation is the ability to issue different classes of stock generally known as common stock and preferred stock. Most corporate shares are common stock. Preferred stock affords an ownership interest while limited voting rights. However preferred stock comes with other advantages. Investors in preferred stock are usually guaranteed a fixed dividend. If the corporation is liquidated, preferred shareholders are paid off before common shareholders. In some cases, corporations will issue customized shares where investors' voting rights are tiered (one class of stock gets ten (10) votes per share and another class of stock gets twenty (20) votes per share). Allowing for different classes of stock provides corporate entities flexibility. In some ways, preferred stock is like corporate debt attracting investors less interested in voting and more interested in a specific return (guaranteed dividends are like interest payments).
In a C-Corporation, a board of directors is appointed which 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 activities. 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.
For a free consultation, please contact San Diego Corporate Lawyer Donald R. Oder at (888) 900-9002.