The most common corporate entity type is the “C” Corporation or General Corporation. This entity is widely used by companies planTning on issuing large quantities of stock in either a private or public forum as there is no limit to the number of stockholders the company is allowed to have. Because a corporation is a separate entity under the law, its shareholders personal liability is limited to the amount they have invested in the company.

Since the C Corporation is a separate taxpayer, it is the corporation itself that pays taxes on the income it receives. This means that after payroll and other deductions, the C Corporation pays corporate taxes on all profits accumulated throughout its fiscal year. The positive of this is that under certain circumstances, income earned by the corporation could in fact be taxed at a lower rate than taxes on a sole proprietor or self-employed person. Also, the C Corporation has its own tax life, meaning that it can survive past its owners, this attribute could be very beneficial in estate planning. C Corporations can also cover items such as pension and medical plans for its employees as well as college assistance programs and other insurance premium deductibles with pre-tax dollars.

The negative side to a C Corporation is that, in some circumstances, the profits can fall under a double taxation scenario. This occurs when dividends are paid out to beneficiaries with after tax dollars only to be taxed again as personal income. This scenario can be avoided however, with a simple election which turns your normal C Corporation into a “pass through” entity like a “S” Corporation.

Advantages of the C Corporation

Creation of the corporate shield that, in the absence of personal guarantees, limits the liability of stockholders to their capital investment in the corporation and the usefulness for estate planning purposes of the corporate form of business organization are frequently cited advantages of forming a C corporation. Other advantages include the following:

• The perpetual life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of your business, despite the incapacity or death of one or more stockholders.
  
• Big tax deductions available to owners of a C corporation that is not available to shareholders that own over 10% of an S corporation are insurance deductions. Medical insurance and other medical costs can be 100% deductible to C corporations. This includes medical insurance payments, deductibles, prescription items and non-prescription items such as aspirin and bandages. Life insurance up to a set limit per person is also tax deductible.
  
• Housing costs and other benefits for employees (including stockholder-employees) can be a tax-deductible expense for the corporation.
  
• Fractional ownership interests are easily accommodated in the initial offering of stock.
  
• The purchase, sale, and gifting of stock make possible changes in ownership without disturbing the corporation's ability to conduct business.
  
• The required separation of finances and records for the corporation reduces the risk of unrecognized equity liquidations.
  
• To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
  
• The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication with the stockholder group (usually a family group) and can provide more comprehensive guidance for management.

Limitations of the C Corporation

It is financially advantageous to the owners of most C corporations to pay surpluses to employees in the form of salaries or bonuses rather than as dividends. Corporate net income distributed to stockholders in the form of dividends is taxed once at the corporate level and again at the recipient’s level. That is, as a corporate entity, C corporations must pay income tax on their net income prior to any distribution of dividends to stockholders, and the dividends are taxable to the stockholders resulting in double taxation of corporation income distributed to the stockholders. The effects of this limitation can be reduced when the stockholders are corporation employees and derive most of their income from salaries and wages paid by the corporation and no dividends are paid.

Other Limitations of the C Corporation

• Conflicts or disagreements among the usually small group of stockholders in a small scale entrepreneurship corporation may immobilize decision making.
  
• Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
  
• Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not participants in operations of the business, and that can result in their becoming a voting block that does not support needs and decisions believed desirable by managing stockholders.
  
• Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
  
• If appreciated assets are owned by the corporation and the corporation is dissolved, income taxes on the appreciation amount will be generated.

The corporate shield of limited liability may be lost:

• When corporate formalities are not followed – that is, when director and shareholder meetings are not held and minutes of such meetings are not kept.
  
• When corporate assets are treated as personal assets – for example, when a corporate vehicle is used for family vacation and the corporation is not reimbursed for the non-business use.