C-Corp Tax Status for General Corporations
One of the more popular requests Harvard Business Services, Inc. (HBS) receives from clients is a request to form a C Corporation or C Corp in Delaware. But when referencing this specific terminology, it’s important to note that the C Corporation is considered a tax status and not an actual entity type filed in Delaware. Clients are typically referencing forming a Delaware General Corporation and the default tax status for Corporations is the C tax status unless the company obtains a different tax status from the IRS directly such as submitting the forms for S tax status.
When clients are looking to form a Delaware Corporation that will have a C tax status, we typically see clients elect to form a Delaware General Corporation. The benefits of a C tax status for General Corporations sometimes lead to great flexibility for business owners and shareholders.
One of the main reasons why clients form a corporation is because they want to bring aboard investors. And one of the popular aspects of the c-tax status for a General Corporation is that anyone can invest in the company, as there’s no limit to the size of the Corporation. Investors can be individuals or other companies, and they do not have to be US residents or US-based entities. This is in contrast to the S Corp tax status which has a limit to its size (max 100 shareholders), requires all shareholders to be U.S. residents/taxpayers, and prevents other companies from investing.
Having the ability to bring on any number of investors provides an enormous amount of flexibility for a C Corporation, and is one of the primary reasons why many Delaware general corporations elect C Corp tax status.
Clients also sometimes have a goal of growing their company substantially by going public. This, in turn, may lead to interest from numerous investors as a General Corporation with a C Corp tax status may have various classes of shares that can be issued to investors more abundantly. Furthermore, top shareholders that want to maintain specific benefits while issuing shares to other investors can look to issue Preferred Stock to maintain specific privileges within the company.
Another reason why C Corps are popular for clients is that investors can retain earnings to reinvest in the company, avoiding shareholder-level taxation. The corporate tax rate is often lower than individual rates, which in turn, enables effective growth.
When planning to form a new Delaware Corporation, just be sure to remember that when referring to a C Corporation or C Corp, this refers to the actual tax status issued by the IRS and not the entity type being formed in Delaware. The General Corporation continues to be the most popular type of Corporation formed in Delaware while others sometimes inquire about a Public Benefit Corporation. At Harvard Business Services, Inc., our team can help you weigh the S Corp vs C Corp tax advantages before making a decision.
If you have any questions about forming a new Delaware Corporation, feel free to contact us at 1-302-645-7400 or 1-800-345-2677 ext. 6900 or via email at info@delawareinc.com
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.