When diving into the world of business structures, one common term you’ll encounter is “C Corporation” or “C Corp.” But what exactly does the “C” in C corp stand for, and why is it significant? In this post, we’ll break down the meaning behind the term, how it distinguishes itself from other corporate structures, and why businesses often choose the C Corp designation.
What Does the “C” in C Corp Stand For?
The “C” in C Corp refers to Subchapter C of the Internal Revenue Code (IRC). This is the section of U.S. tax law that governs how these corporations are taxed. The distinction is important because it determines how the business will be structured and how profits will be taxed compared to other corporate forms like S Corporations or LLCs.
Key Features of C Corps under Subchapter C
1. Double Taxation
One of the hallmarks of a C Corp is that it is subject to double taxation:
- First Level: The corporation pays income tax on its profits. The current corporate tax rate is 21%.
- Second Level: If dividends are distributed to shareholders, they are taxed again on the shareholders’ personal tax returns.
This is in contrast to S Corps, which benefit from pass-through taxation, avoiding corporate-level taxes.
2. No Restrictions on Ownership
C Corps can have unlimited shareholders, including foreign investors, which makes them an attractive structure for companies looking to raise capital. By comparison, S Corps are restricted to 100 shareholders and only allow U.S. citizens or residents as owners.
3. Ability to Issue Multiple Classes of Stock
C Corps can issue common and preferred stock, offering more flexibility for investors. This feature makes it easier to attract venture capital or go public in the future. S Corps, on the other hand, are limited to issuing only one class of stock, restricting ownership flexibility.
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Why Choose a C Corp?
Many companies choose to structure as a C Corp because of the potential advantages despite the double taxation issue. Some of these benefits include:
- Access to Venture Capital Funding: Investors often prefer the C Corp structure because it offers more flexibility in ownership and stock classes.
- Qualified Small Business Stock (QSBS) Exclusion: Shareholders may qualify for a significant tax exclusion on capital gains after holding their shares for at least five years.
- International Growth and IPO Opportunities: For companies looking to grow globally or go public, the C Corp structure is the most suitable due to its scalability.
How Does a C Corp Compare to an S Corp?
While both structures offer liability protection, the choice between a C Corp and an S Corp depends on the business’s goals. C Corps are more suited for businesses that plan to expand aggressively, attract investors, or issue stock. S Corps, on the other hand, are ideal for smaller businesses that want to avoid double taxation and maintain a simpler ownership structure.
Conclusion
The “C” in C Corp ties directly to Subchapter C of the Internal Revenue Code, setting the framework for how these corporations are taxed and managed. While the concept of double taxation might seem like a disadvantage, the flexibility and growth potential offered by a C Corp make it a preferred choice for many businesses aiming for expansion and investment opportunities.
If you’re considering forming a C Corp, it’s essential to understand the tax implications and legal requirements. With the right strategy, a C Corp can help you take your business to the next level.
Are you thinking of converting your LLC to a C Corp for tax or investment reasons? Reach out to Build Accounting today and get started for expert guidance on the best structure for your business needs!
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About the Author
Brett Rosenstein
Founder of Build Accounting
Certified Public Accountant
Brett is the founder and president of Build Accounting where he provides accounting, tax filing, and CFO services for tech startups and SaaS businesses. His goal is to make the accounting and tax process as simple, streamlined, and headache-free for business founders as possible.
Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.
When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places.
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