A C corp (C corporation) is a business structure that is taxed separately from its owners. Shareholders are owners of the corporation, each having a fractional interest in the whole. A shareholder could own a single share of the company, or millions of shares. C corps raise funding through the sale of these shares.
This type of business entity is required to follow corporate formalities, statutory compliances, keep detailed corporate records and hold mandatory annual meetings for shareholders and board directors.
A C-Corporation will be the best choice for bigger entities which are planning to issue large no. of equity shares to larger number of persons through private placement in closely held promoter-driven companies, through public issue or seek investments from international investors.
C-Corp can issue both common stock and preferred stock. Common Stock comes with voting privileges, whereas Preferred Stock comes with no voting privileges, but preferred stockholders jump the line in terms of priority when it comes to receiving dividends, or pay-outs if a company is liquidated.
C-Corporation can be run by Non-Resident Aliens without worrying about the citizenship of U.S. but for official, legal and tax correspondence, a registered agent address is required in U.S where all the correspondences can be sent and serviced for the C- Corporation.
C-Corporations will work under a hierarchal structure. It is similar to a company registered in India. At the top, Shareholders will be given different voting power based on their holding. They appoint directors who will be responsible for all corporate decisions. Officers with different designation will be appointed by the directors with the approval of shareholders to run the day-to-day operations of the company. After Tax payments, profits will be distributed among Shareholders in the ration of their shareholding.
A Non-Resident alien can become an owner, a shareholder, or a director in a C corporation in the U.S. without having a valid visa and without any requirement to visit the country personally but to work in the business as a Non-Resident officer, one has to complete all legal documentation. One can get punished with fines & penalty if found guilty in the U.S. for working in a C- Corporation without a valid work visa and that may lead to deportation also.
C-corporation has a widespread and multifaceted tax reporting obligation than other form of business and it functions separately from their owner(s). C-Corporations are liable to pay corporate income taxes on its income earned. C- Corporations have to file various quarterly reports to the IRS. State income tax is only applicable to C Corporations, not LLCs if any income is earned by the corporation in the state, unlike Federal Income Tax that applies to all U.S. sourced income. For example, C-Corporations pay a tax of 8.7% on its taxable income allocated and apportioned to Delaware in the state of Delaware.
Its Business Income will be reported by filing Corporate Tax Returns. Corporate Income Tax will be levied on C-Corp Income and it pays its shareholders dividends from its after-tax income. The shareholders then pay personal income taxes on the dividends. This is the often-mentioned as “double taxation” Any dividend income distributed to foreign owners will not lead to double taxation only if a Tax Treaty exists between the owner’s tax-resident country and the U.S.
Generally, Dividends paid to non-resident shareholders are subject to a 30% withholding tax of the gross amount. For instance, if dividend of $2,000 is payable by the company, withholding tax will be $600 that will be paid to the IRS. It must be declared along with the withholding taxes and dividend amount on Form 1042-S and Form 1042 at year-end. Even if no amount has been deducted from the payment due to a treaty or taxation exception, Form 1042-S is to be filed. Each type of income received requires a separate 1042-S form like Royalties, Scholarships, Income from real estate, Dividends paid by the U.S. corporations, Pension income, Gambling winnings. In certain cases, a W-2 may be issued in addition to a 1042-S.
The Form 1042-S is a year-end tax document used to report income payments, taxes withheld, and tax treaty benefits granted to international individuals. The form may be issued to employees, students, or suppliers who received payments from Corporations. This form must be attached when filing your annual U.S. income taxes using Form 1040NR or 1040NR-EZ.
A lowering withholding tax rate will be very beneficial if a tax treaty has been signed by the U.S. with your country. For example, Indian Residents will be benefitted with a lower 25% withholding tax rate for Dividend Income received from C-corporation. Form W-8BEN is used to claim this tax benefit by submitting the withholding certificate to the company.
Form W8-BEN, Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding, is used by a foreign person to establish both foreign status and beneficial ownership, and to claim income tax treaty benefits with respect to income other than compensation for personal services.
As a separate tax entity, C-corporation files its own tax return and pays its own tax liability. Funds are not freely transferable between the owners (shareholders) and the C-corporation. But C-corporation can reimburse the owners for the expenses paid by them on behalf of the business. Also, the C- corporation can pay owners for the services they provide to the corporation like Remuneration to Directors, etc. These are allowable business expenditures for C- corporation.
The shareholders can transfer funds from the business only in the form of dividends. But Dividends are not allowable business expenses for C- Corporation. As a shareholder of a C-corporation, you won’t need an ITIN. An ITIN is only required to file US Tax Returns for US tax reporting obligations due to US business interests & US sourced Income. Tax has been withheld on dividend Income and can be reported in Shareholder Resident Country by taking benefit of Tax Treaty Claims with U.S.
The brief list of steps for forming a C-Corp when starting a business are as follows:
- Register a unique business name.
- File a Form SS-4 to obtain an Employer Identification Number (EIN) from the IRS.
- Appoint officers to the corporation (CEO, Board of directors).
- Draft and file Articles of Incorporation with the secretary of state in your state. There may be financial benefits to filing in some states over others, i.e., a state where the corporate tax rate is lower.
- Write company Bylaws.
- Issue stock. Blank paper share certificates can be purchased at office supply stores or online. These certificates indicate the percentage of the corporation the holder owns. The number of shareholders is important. C-corps with fewer than 35 do not need to register shares with the US Securities and Exchange Commission.
- Apply for a Business License at the State, County, and Municipal levels.
In a nutshell, major benefits/ drawbacks of forming and operating as a C-Corp are stated below:
- Limited legal and financial liability for owners.
- Ease of access to funding by selling stock—as much as you like!
- Shares are freely transferable.
- More attractive option to investors looking for passive income.
- Ability to reinvest in the business at the corporate tax rate rather than at the owner’s personal income taxes rate (as is the case for S corps and LLCs).
- A general perception of legitimacy—companies that sell shares are subject to a lot of regulations that give investors’ confidence in the solidity of the business.
- Expensive to form compared with other structures, like LLCs or sole proprietorships, due to the level of legal complexity, which will likely involve hiring a tax professional and one (or more) lawyers.
- Complicated operations, statutory compliances, and mandatory reporting.
- Double taxation.