Find out what a C Corp is and how it works

Find out what a C Corp is and how it works

Today, you will learn what a C Corporation is, its advantages, and what you need to create one.

So, if your mission is to open a business in the United States, but you feel a bit lost and don’t know how to do it, then you are in the right place.

What Is a C Corporation?

que es una c corp

It’s one of the most common structures among entrepreneurs who want to register a company in the USA. In this type of corporation, shareholders pay taxes separately from the entity.

Many associate it with an S Corporation or think it’s almost the same, but it’s not.

I’ll explain the reasons for this later; keep reading.

C Corporations are subject to corporate income tax. That’s why there’s double taxation on the company’s profits, both on the corporate and personal levels.

Although, for startups, in most cases, this double taxation doesn’t apply because startups usually reinvest their capital and don’t typically pay dividends.

This structure is one of the most used for entrepreneurs who want to start a startup.

Why?

Well, it attracts investors, protects intellectual property, limits liability, and allows for various stock options.

How Does a C Corporation Work?

como funciona una c corp

A C Corporation is structured hierarchically as follows:

  • Shareholders
  • Directors
  • Advisors

Shareholders

These are the owners of the company. However, these individuals delegate decision-making and management of the company to the directors.

Directors

Even though they are not the owners of the company, these individuals are responsible for leading the company’s management and making important decisions, such as establishing operational policies, making financial decisions, selecting managers, and growing the business.

Managers

Managers are responsible for executing the decisions and plans made by the directors. In other words, they handle the operational aspects of the company.

If it’s a startup that is just beginning, the people who founded the company fulfill all these roles. They are shareholders, directors, and managers.

Starting from institutional investment rounds like Series A, this structure begins to change.

In this case, Venture Capital funds become shareholders, and the partners of the same fund become directors as part of the company’s Board.

Based on this structure, we can say that this business model is the traditional model, as it adopts bylaws to stipulate the obligations and rights of shareholders.

It also establishes the effective date of the Articles of Incorporation (a document certifying the company’s existence before the state).

These are things that are not adopted, for example, in an LLC, hence the difference.

Taxes in a C Corp

When we engage in commercial activities under a legal entity, we acquire two responsibilities.

1. Legal responsibility: it relates to the state where our company is registered.

2. Tax responsibility: it refers to the taxes that must be paid.

So, speaking in terms of taxation, in a C Corporation, the owners of the company must receive a reasonable payroll salary during the year.

And for these salaries, taxes must be paid. These taxes are known as Matching Taxes or Tax Matching.

Owners also have the right to share a portion of the company’s profits, in addition to their salary.

All the money that is tax-free can be withdrawn and received.

In a C Corp, these tax-free profits are called dividends, and at the end of the year, these dividends are also subject to taxes.

At the end of the year, Form 1120 must be filled out, reporting all the money received minus all deductions and expenses for which the corporation qualifies.

By performing this mathematical operation, the net profit is obtained.

This net profit will be subject to a 21% tax that must be paid.

In the case of owners who distributed that profit at the end of the year, they will receive Form 1099-DIV (Dividends and Distributions).

Regarding capital gains tax rates, these can range from 0%, 15%, or up to 20% depending on the money generated during the year and your personal situation.

Benefits of a C Corp

benefits of a c corp

1. Limited Tax Liability

The owner of the C Corp enjoys limited liability protection.

This means that there is a separation between the founders or investors and the company. So if something goes wrong in the company, their personal assets will not be affected.

2. Ease of Raising Funds

It is easier to raise capital and allow the entry of new investors because a C Corp makes the process of issuing shares and transferring ownership much simpler.

If a startup does not have legal presence in the United States, it will be more challenging for a Venture Capital fund to invest in it.

3. Reduced Legal Uncertainty

Startups and investors prefer to invest in a C Corp because they are well acquainted with its legal rules, as this structure has been the most common for years.

4. Peace of Mind for Shareholders

Intellectual property is legally owned by the company. Since it is not owned by the founder or any employee, shareholders feel more at ease when investing.

Need Help Opening a C Corp?

If you need to open a C Corp in the United States but don’t know how, are located outside the country, are a foreigner, or for any other reason, then contact us.

Our team will be delighted to advise and assist you in fulfilling your dreams of creating a company in the United States.

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