C Corp refers to the way a corporation is organized and how the corporation will be taxed. It also defines the degree of personal liability any partners may have in regard to debts the corporation may incur.
C Corps are taxed in a very specific way, and taxation percentages are based on profit. One that makes 50,000 US dollars (USD) a year in profits will be taxed at 15%. One that has profits ranging from 10 to 15 million USD per year is taxed at 35%.
In addition to the taxes a C Corp pays on profits, employees or partners of the corporation must also pay tax on income they receive. Some criticize this type of business because it employs this dual taxation on earnings, but the monies paid in salary tend not to be subject to income tax, as they do not represent portions of profit. Therefore, owners and partners who draw large salaries can reduce the actual amount of profit, thus reducing percentage of taxes taken.
The C Corp also has the benefit of no liability for partners or shareholders. Once a corporation is created, it becomes responsible for debts accrued by itself. Partners may create a corporation, but afterwards, they have no personal liability toward that corporation unless they commit an illegal act such as stealing money from the company or falsely reporting earnings.
An alternative to the C Corp is creating a Limited Liability Company (LLC). LLCs are structured differently for the purposes of taxation and liability. LLCs are not taxed on profits, but instead all owners of the LLC are taxed through personal income received from the company. Also, the LLC is constructed for a limited period of time. C Corps continue for as long as taxes are paid on the company.
Moreover, owners of an LLC can be held personally liable for the debts of the company. Most people find this aspect of the LLC to be particularly frightening, as starting new businesses involves risk of failure. Others prefer the LLC because it does not result in dual taxation, and also because an LLC can be organized in about ten minutes over the Internet.
