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C-Corporations

A corporation is governed by subchapter C of the Internal Revenue Code for tax purposes (a “C-Corp”), the default treatment unless an express election is made by the shareholders to be taxed under the provisions of subchapter S of the Code. Earnings of the C-Corp are subject to double-taxation; the corporation is first taxed on its profits and then its shareholders are taxed again on the receipt of those profits that are paid out in the form of dividends. A corporation can, however, distribute income to shareholders as salaries (provided the amount is reasonable) for services actually rendered, and these salaries can be deducted as an expense of the corporation.

A C corporation has no limitations on the type or number of shareholders it may have. Its shares are generally freely transferable. Therefore, it is the best vehicle for raising capital from large numbers of investors in the public markets. C corporations can also issue incentive stock options that may reduce the amount of capital a corporation would otherwise need for employee compensation.

A C corporation has no limits on classes of stock, so it may issue separate classes of common and preferred stock. It may also issue bonds or borrow money on terms that appear very similar to equity investments. Because a C corporation's shareholders are not liable for its debts, lenders may require personal guarantees from a small corporation's shareholders. Income is not attributed to shareholders but is taxed at the corporate level. Shareholders are not taxable except on the receipt of dividend distributions or liquidating distributions from the corporation.

- Robert C. Norton J.D. LL.M.
  Stone, Rosenblatt & Cha

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