What is a C Corporation (C Corp)?
An Essential Property Management Term
A C corporation (or C corp) is a legal structure for a business in which the owners, or shareholders, are taxed independently from the corporation. C corporations are the most common type of corporation in the United States and they are a wholly separate legal entity from their owners. C corps pay taxes on their income and may be organized for the specific purpose of conducting business, in which case it can also be called a “doing business as” (DBA) entity.
A C corporation is owned by shareholders, who elect the board of directors and control the company through their ownership share. In addition to electing directors, shareholders also elect two individuals to serve as managers: a Chief Executive Officer (CEO) and a Vice President of Finance.
How a C Corp is Taxed
A C corp is taxed at the corporate level, which means that all of its income, including profit and dividends, are taxed at a flat rate. Dividends are then paid to shareholders, and those dividends are then taxed at each shareholder’s individual tax rate.
Many people view this double taxation as a weakness of C corps, and it’s a major difference from an S corp (for Subchapter-S Corporation), which is only taxed at the shareholder level.
Pros of a C Corp
- C corporations are a tax-advantaged business structure. The IRS allows you to deduct all your business expenses on a Schedule C tax form, which is filled with your income taxes.
- C corporations are the most common business entity in the United States and Canada, but there may be better options for your specific business. Suppose you want to raise capital from investors or merge with another company. In that case, it may make more sense to become an LLC because these entities offer greater flexibility than corporations.
- Limited liability: As long as your shareholders don’t actively participate in management decisions that go against their interests (e.g., firing employees), there are few limits on what can happen if things go awry with your company’s finances. With a C corp, you won’t have personal liability for any debts incurred by shareholders – unless there was fraud involved when selling equity shares.
Cons of a C Corp
- A C corporation is more expensive to set up and maintain than a regular business. It’s also more complicated and complex in terms of its legal structure, the taxes it pays, and how it has to operate.
- A C corp needs to have a separate legal entity status from its owners (the shareholders), meaning that any dividends paid to shareholders are taxed at the corporate level and also taxed as personal income for each shareholder.
- There are additional costs associated with operating as a C corp, which may include fees to legal firms, accounting firms, insurance policies, and required licenses.
C Corp vs. S Corp
A C corporation is a separate legal entity from its owners, called shareholders. When you own shares in a C corporation, your tax liability is determined by what percentage of the company’s profits you receive as distributions. The IRS taxes dividends received by shareholders at their marginal tax rate.
Alternatively, S corporations are pass-through entities that don’t have an independent existence apart from their owners. They’re taxed just like partnerships or sole proprietorships. They don’t have to file an annual Form 1120S unless they elect to pay quarterly estimated taxes (Form 1120-F).
Since S corps and their owners aren’t taxed as separate entities, they’re not required to file Forms W-2 or 1099s with the IRS because there are no distributions made between them and their shareholders; however, if any cash is distributed within the year, then this must be reported on those forms along with any other income earned throughout that period, such as interest payments made between partners/shareholders during that time frame.
Difference Between LLC and C Corporation
A C corporation is a separate legal entity from its owners. It’s an actual company that can own property, conduct business, pay taxes, etc. You’ll have to file your taxes as a C corporation if you want to be taxed as one (although you can elect not to do this).
A Limited Liability Company (LLC) is also a separate legal entity but has less protection from liability than a corporation.
LLCs are pass-through entities, meaning they don’t pay self-employment tax, and therefore pass their income or losses directly onto their owners according to their ownership percentage in the company.
A C corporation is a business structure that offers limited liability protection to its owners while allowing them to enjoy the benefits of pass-through taxation. If you’re thinking of starting a business or are already running one and looking for ways to minimize your tax liability, a C corporation may be the right choice for you.
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