Typically, companies that trade on an organized stock exchange are C-Corporations. The C-Corporation is owned by stockholders (which can be unlimited in number) who elect directors to the Board of Directors. The Corporation can sell shares of stock (common or preferred) to raise capital (money) to fund its operations. Stock certificates are relatively easy to transfer and this is especially the case if the corporation is publicly traded on an exchange such as the New York Stock Exchange. The Corporation can sell products and services, buy real estate, enter into contracts, and sue and be sued, and the owners (stockholders or shareholders) bear no personal responsibility for the actions of the company executives.
At minimum, an annual board of directors and shareholders’ meeting must take place where major decisions are recorded and the company’s results of operations must be reported at least once per year and often every quarter. The company’s corporate by-laws govern the corporation’s major activities. The C-Corporation has an unlimited life, separate from the illness or death of any owners. When the founders or even a major or controlling shareholder dies, the Corporation’s existence continues.
Primary advantages of the C-Corporation:
Limited personal liability for debts. Shareholders cannot be held liable for the company’s debts and other obligations; Shareholders losses are limited to their investment, (the amount of money they purchased their stock with); The corporation can take a tax deduction for fringe benefits (healthcare, travel and entertainment) as business expenses (vs. LLC’s and S-Corporations which cannot); C-Corporations have the ability to split (allocate) profits between owners (shareholders) and the Corporation, thereby lowering the Corporation’s overall tax rate.
Primary disadvantages of the C-Corporation:
Double taxation of profits when dividends are distributed to shareholders. For example, when a Corporation makes money (generates a profit) it can retain the cash to fund operations or distribute some or all of the cash as dividends to the shareholders. When a Corporation earns a profit (sales revenue minus its expenses), the Corporation pays income taxes on those profits. When the Corporation pays a dividend to its shareholders, the Corporation does not receive a tax deduction for its dividend payments. But, the shareholders who receive the dividends are required to declare the dividends on their tax returns. Hence, the concept of “double taxation.” The Corporation pays taxes on its profits and then the shareholders pay income taxes on the dividends they receive. C-Corporations are generally more complicated to run and manage than other corporate entities such as a LLC. A C-Corporation is treated as a “separate person” for income tax purposes by the IRS and the Corporation must file income tax returns (IRS Form 1120). On the other hand, an S-Corp. files an information return known as IRS Form 1120S and the owners (individuals) report their pro rata share of the S-Corportion’s income and losses on their tax returns.