C-Corporation (C-Corp)

What does it mean

A C-Corporation is a type of legal entity that establishes a shield between business assets and personal assets; so in the event a business is sued, the owner’s personal assets are protected.  

Why does it matter

For a community bank, a C-Corp is a less prevalent business type, and if you do come across one, likely it is a pretty old business because this entity type was more of the rage in the 1980s or earlier.  Like other entity types, C-Corps provide a shield that separates business assets from personal assets.  For a Community Banker, the main difference of a C-Corp compared to other entity type is their tax treatment.  

In other entity types such as LLCs, the income earned by the business will flow proportionally onto the owner’s personal taxable income (via a K-1), and then the owner will personally be responsible for the taxes needed for that income (the owner likely funds those taxes by taking a (tax free) distribution from the business).  In this instance, the business doesn’t pay its own tax, but rather the individual owner does.  C-Corps are different though because for a C-Corp, the business has a taxable income, and then the business is responsible for making the tax payment.  Outside of paperwork, that doesn’t seem like a very big deal, but where it does become a big deal is the “double tax” impact it has on the business.  For a LLC, the business income flows into the individuals personal income, and then they personally pay the tax.  As a result, the tax has been paid; so any additional money distributed from the business is tax free.  In the case of a C-Corp, the business creates a taxable income that it must then pay the tax bill on, but if the business wants to also send a distribution to it’s owner, that distribution is TAXABLE as well (double taxation).  

Why this matters to a community banker is because our ultimate goal is to get our loans repaid; so being aware of the tax impact a entity type has on the amount of cash available to pay their debts is very important.  

Other Relevant Terms

• Capacity
• Limited Liability Company (LLC)
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