What is a Delaware C Corporation?

Directors and shareholders of a Delaware C corporation are afforded minimal liability protection since the corporation is an independent legal entity from its stockholders. Apart from their similar form, C-Corps are unique among corporations due to their taxation and capital-raising capabilities.

Let’s define the Delaware C Corporation

A C corporation is defined as a tax status rather than a form of commercial entity. In reality, all corporations are, by default, C corporations, unless they do any of the following:

  1. File Form 2553 with the IRS for S corporation status;

  2. or file a 501(c) application with the IRS for non-taxable status.

A Delaware C corporation is a distinct entity from its stockholders, therefore directors and shareholders have minimal liability protection. Furthermore, C-Corps vary from other businesses in terms of taxation and investor capital raising, although having the same form.

C-Corp Taxation

One of the most important C-Corp perks is taxes. C companies can allow you greater freedom in planning and structuring your federal income taxes than partnerships or sole proprietorships.

A Delaware C-Corp can pay for workers’ fringe benefits and then deduct the costs as business expenditures. This ensures that neither the owner nor the employee pay income tax on the value of the fringe benefits received.

As an example, a C-Corp can deduct the following employee benefits:

  • Health insurance
  • Disability insurance
  • Group term life insurance
  • Reimbursement of employee medical expenses not covered by insurance.

Before making use of these tax incentives, a start-up must wait a few years until the firm turns a profit. However, with a C company, fringe benefits are deductible as a business expenditure.

The advantages must also be nondiscriminatory, meaning they are not intended simply to benefit the owners.

Furthermore, as long as the owners pay themselves appropriate compensation, their earnings can be deducted from the C-Corp’s profits, reducing the amount of corporation tax payable.

First, the C-Corp deducts all business expenditures, including but not limited to the cost of commodities, wages, fringe benefits, interest payments, and capital upgrades. This strategy balances a C-Corp’s profits with its owners’ remuneration, leaving minimal taxable income on which the firm must pay taxes.

A lot of C-Corps do not pay corporation taxes since the owners are also workers, and their salaries and bonuses (or any other sort of remuneration) can be deducted as company expenses.

Thus, one option to avoid double taxation could be to pay greater salaries to the owners rather than issuing dividends, yet the individual’s income tax on a salary is higher than the tax on dividends.

A C corporation may keep earnings in order to enhance the firm if it conforms with the applicable tax requirements.

C-Corp taxes on retained earnings are minimal; this is unique to C-Corps, and they are also less likely to face an IRS audit than a sole proprietorship or LLC.

When are C-Corporation Franchise Taxes Due?

C companies must pay the Delaware Franchise Tax by March 1st of each year. Regardless of the date of formation or firm activity, all Delaware corporations are required to pay the yearly Franchise Tax.

C Corporation Liability Protection

Another commonly mentioned C-Corp advantage is the restricted liability protection that comes with this kind of corporation. Business owners who run sole proprietorships or partnerships put their assets and cash at risk if the company begins to lose money or is the subject of legal action. Whereas if you are an incorporated corporation, your limited liability is protected since your business is a fully independent entity with its financial position, making it difficult for someone to pursue your assets.

Raising Capital as a C Corporation

Another distinguishing feature of C-corporations is that they are the preferred entity for venture capital and angel investors.

In 2019, Delaware C companies accounted for more than 89% of new IPOs. Most venture capitalists will only invest in Delaware C businesses.

If they wish to invest in a firm that is not a Delaware C corporation, they will most likely want you to re-incorporate in Delaware as a C corporation before investing.

In the world of corporate finance, the primary tool for raising capital is the class of stock known as “Delaware Blank Check Preferred Stock.” This class of stock allows the Board of Directors to negotiate with investors and tailor a series of stocks to meet the needs of both the investors and the directors.

To work with an accounting firm that handles many international groups, reach out to our team.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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