A C Corporation is recognized by the law as an individual entity, separate from its shareholders (owners), many times treated as a human being.
Shareholders enjoy limited liability for the debts, obligations and liabilities incurred by the business as well as liability stemming from possible legal action.
Protection of shareholders personal assets is one of the major reasons business owners choose to incorporate. Normally, shareholders cannot lose more than the amount they invested in the corporation. If the corporation goes bankrupt, the shareholders will not be liable for its debts. Should someone sue the corporation and the corporation is found liable, they can take the corporation’s property to satisfy the judgment but if that property does not satisfy the judgment, they will not be able to take a shareholder’s personal assets, i.e. home, car, bank account. An exception to a shareholder’s limited liability happens when the corporation has recklessly harmed people or has been used to perpetuate a fraud.
C Corporation Taxation
C Corporation shareholders do not report any of the business income and expense on their individual tax return. The corporation files tax returns and pays its income taxes (at generally lower tax rates than would individuals) while the individual shareholders report and pay personal income taxes only on monies paid them by the corporation.
It should be noted that shareholders are required to pay income taxes on income from dividends paid by a C Corporation even though income taxes have previously been paid by the corporation.
Why Form a C Corporation?
C Corporations best serve owners who want the limited liability, a more formal business structure, the ability to reduce overall income taxes and accumulate assets in the business, and ways to more easily raise capital.
Official documents, typically called a Certificate of Incorporation or Articles of Incorporation, must be filed with the appropriate state in order to form a C Corporation.
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