Summary: In this particular episode, you will learn About C-Corporations Introduction to S-Corporations Podcast transcript: Disclaimer: This information is for educational purposes only and not to be used as tax or legal advice. Tax law and accounting protocol are constantly changing. Topics Corporation (C-Corporation) Share Types and Stock Ownership Corporate Governance Summary Subchapter S Corporation (S-Corp) Other Business and Not For Profit Structures Conclusion: Business Types Corporation (C-Corp) The C-corporation (C-Corp) is a business entity that is legally separate from owners, referred to as shareholders. Taxation is also separate and occurs on the corporate level. As a separate entity, the owners are not personally liable for business debts and lawsuits. While the corporate structure provides liability protection, owners and employees can still be liable for negligence. Because a corporation is separate from an individual, it can operate in perpetuity. Corporations are an effective structure for outside investors, as they are protected from corporate liability, may have different ownership types, and can operate after the death of the main owner. Company ownership is in the form of corporate stock or shares. Several different share types exist, depending on the needs and size of a corporation. Owners can receive cash from the corporation in the form of dividends if there are retained earnings on the balance sheet due to prior profits. Advantages Corporations are designed to facilitate investment and live in perpetuity. Non-employee investors can own a fraction of the corporation without the concern of personal liability. Shareholders can be paid out profits via dividends or invest for potential capital appreciation. Capital appreciation refers to when stock purchased in a company increases in value over time for the shareholder. Stock held by investors have unrealized gains or losses until sold or become worthless. Large corporate stock is traded daily and the value of the stock is easily determined and realized with a sale. Because publically traded stocks are easy to buy and sell, investors may be more comfortable investing in stocks versus other types of business structures. Corporate law and ownership transfer is well established in court systems which appeals to many investors. Disadvantages The primary disadvantages to the corporate structure are double taxation and other compliance costs. Double taxation refers to the combined corporate tax on profits before dividends and dividend income taxed at the individual level. Dividends are not a tax deduction to the corporation and must be paid in order to transfer cash to shareholders. To reduce double taxation, a company may actively perform tax planning which requires current accounting records and additional professional fees. Owner employees are compensated through payroll, which adds to the cost and complexity of the structure. Accounting Accounting for corporations under GAAP requires double-entry, accrual based accounting for financial statements. Stock appears in the equity section of the balance sheet and different types of stock are outlined in the statement of shareholders’ equity. Because corporations are a taxable entity, significant differences may exist in GAAP income and taxable income, which are accounted for in technical ways, such as deferred tax accounts. Payments to non-employee shareholders are in the form of dividends, which reduce retained earnings when declared. An owner may not simply withdraw capital, as owners of partnerships and sole proprietorships can do. Share Types and Stock Ownership Stock in a corporation represents ownership and different rights to a corporation. Various types of stock may be issued that pay different dividends or have different voting rights. Preferred stockholders can have preferential treatment for dividends compared to common stockholders.
