C Corps are a type of company that determines taxation and personal responsibility for debts. They are taxed based on profit, and employees must also pay taxes. C Corps have no liability to partners or shareholders. An alternative is LLC, which is not taxed on profits but has personal liability for owners.
C Corp refers to how a company is organized and how the company will be taxed. It also defines the degree of personal responsibility that the partners may have in relation to the debts that the company may incur.
C Corps are taxed in a very specific way and the tax rates are based on profit. One making US$50,000 (USD) a year in profits will be taxed at 15%. One who has profits ranging from 10 to 15 million dollars a year is taxed at 35%.
In addition to the taxes a C Corp pays on profits, the company’s employees or partners must also pay taxes on the income they receive. Some criticize this type of business for employing this double taxation on earnings, but the sums paid as wages tend not to be subject to income tax, as they do not represent profit shares. Therefore, owners and partners who earn large salaries can reduce the actual amount of profit, thereby reducing the percentage of taxes withheld.
C Corp also does not have the benefit of any liability to partners or shareholders. Once a corporation is created, it becomes liable for the debts it accrues. Partners may set up a company, but thereafter have no personal liability to that company unless they commit an illegal act such as stealing money from the company or falsely reporting earnings.
An alternative to the C Corp is setting up a limited liability company (LLC). LLCs are structured differently for taxation and liability purposes. LLCs are not taxed on profits, but instead all owners of the LLC are taxed through the personal income received by the corporation. Also, the LLC is formed for a limited period of time. IC Corps continue until taxes are paid on the corporation.
Also, the owners of an LLC can be held personally liable for the company’s debts. Most people find this aspect of the LLC especially scary, as starting a new business carries the risk of bankruptcy. Others prefer the LLC because it doesn’t involve double taxation, and also because an LLC can be set up in about ten minutes on the Internet.
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