the advantage and disadvantages of using C corporation.
A C corporation is also called a corporation. It is said to be one of the oldest forms of a business unit and can be defined as a business entity that is formed and is regulated by the state. In C corporations, profits are taxed separately from its owner. Moreover, these corporations are owned by the shareholder who elects the board of directors. The board of directors are responsible for overseeing all the operations of the corporation, like decision and policymaking. Therefore, the study will discuss the requirement that is needed to meet when structuring different businesses into a corporation. It will also discuss the advantage and disadvantages of using C corporation.
The legal requirement for a C corporation are as follows: firstly, the appointment of a board of directors. For a corporation to maintain its operation, it must elect the board of directors. The board of directors is tasked to oversees the day to day operations of the corporation. There is no minimum number of the board of directors that is required. Secondly, the other requirement is that the C corporation is by the shareholders (Galbraith, 2014). The C corporation must abide by the state and federal laws concerning stock and shareholders. The third requirement is that they are required to hold the Annual General Meeting (AGM). The AGM is used to discuss the way forward of the corporation like opportunities, risk, strategic decision making, and also any other issues affecting the corporation. Lastly, the corporation is required to create articles of incorporations. The reports of incorporations show the head offices of the corporation, how it is structured, and also how it carries its operation.
The advantages of a C corporation are that the members have limited liabilities, which means if there were debts that were incurred by the corporation, the shareholders are not personally liable, but the corporation is. Another advantage is that there are no limits to several stockholders. It gives the corporation a chance to sell their shares to a large number of investors hence raising more funds for projects (Hiller, 2013). It is also easily transferable of shares. The shares can be transferred from one investor to the other without any restrictions. The shares can be traded to the public in the stock exchange market.
However, the C corporation suffers the following disadvantages; firstly, the members suffer double taxation when the dividend is paid. The shareholders are firstly taxed at the corporate level as profits and also at the individual level as dividends. Secondly, there are regulations, formalities, and legal rules that a corporation must meet. It is required to follow complicated formalities for it to be operational. Thirdly, the corporate does not deduct for a corporate loss, but rather it is imposed on the shareholders through their return (Galbraith, 2014). During the formation, the corporation is required to file articles of incorporation by stating their principal office and their operations.
The mode of compensation for the officers of the corporation might be compensation for the services rendered on their capacity or else a dividend in the shareholder capacity. If the employee takes payment, they are subjected to tax at two different levels that are at the organization’s and personal level, and the tax paid would be at the average level of 39.6%. However, when the employees receive the dividends, there would be no taxes at the payroll, and the tax rate will be at the level of 23.8%. From what is seen above, taking dividends would be the best option (Hiller, 2013). However, there must be a consideration to the side of the corporation the mode of payment they would choose. When they decided to pay employees dividends, they will suffer a tax of 35% as compared to when they pay employees by compensation, which would be zero tax; hence the corporation will prefer settlement over dividends while paying their employees.