W hen starting a business, selecting an appropriate entity type for the company you seek to run is essential. Depending on the size of the business, how it is managed, its growth potential, and any tax implications, business owners can choose from a variety of structures. One structure type is a C corporation (C corp). Here’s a look at what a C corp is, its pros and cons, and how to form and maintain one.
Introduction to C Corporations
A C corporation is a specific legal structure for a corporation. It is called a C corp because it is taxed under Subchapter C of the Internal Revenue Code (IRC). Under this structure, the company’s assets are separate from the owners’ assets. The owners are also the shareholders who contribute money and capital to the corporation so it can operate, and the corporation routinely issues stock to the shareholders. C corps have few restrictions on who can own shares, allowing for domestic and international ownership. There is also no limitation on the total number of shareholders.
Benefits of a C Corp
An S corporation offers a unique tax advantage by electing to be taxed under Subchapter S of the Internal Revenue Code. Key features include:
- Pass-through taxation—corporate income and losses pass through to shareholders’ tax returns, enhancing tax efficiency.
- Limited liability—protection of shareholders’ assets from business liabilities.
- Shareholder restrictions—S corporations can have a maximum of 100 shareholders, who must be U.S. citizens or permanent residents.
- Single class of stock—S corps can issue only one class of stock, ensuring equal voting rights and simplifying ownership structures.
Understanding these features is crucial for determining if an S corp aligns with your business needs.
Benefits of a C Corp
Limited Personal Liability
Since a C corp is a legal entity separate from its owners, it provides limited liability protection. This means that shareholders are not personally liable for corporate debts and liabilities beyond their investment in the company. A lawsuit related to the company cannot target the owners’ personal assets. And if a creditor is pursuing a debt from the business, they cannot go after the owners’ personal assets.
Tax Advantages
A C corp can generally deduct fringe benefits as a business expense for tax reporting purposes. The cost of providing benefits such as medical, dental, vision, and prescription perks for employees can be subtracted from the corporation’s taxable income, thereby reducing the tax liability. Additionally, the corporate tax rates may be lower than the personal rates applied to S corps, sole proprietorships, and partnerships.
Perpetual Existence
The corporation continues to exist uninterrupted even if a shareholder leaves the company, dies, or sells their shares.
Ability to Raise Capital
A C corporation can attract investors by selling stock, allowing the company to experience unlimited growth potential. C corps can issue multiple classes of stock and have unlimited shareholders. Investors are enticed by the opportunity to purchase stock because it can provide them with a return on their investment if the business is successful. Investors and partners often view C corps as more credible business entities. The C corp structure appeals to business owners seeking financial flexibility, significant growth opportunities, and protection from certain risks.
Disadvantages of a C Corp
The main downside to organizing your business as a C corporation is that profits may be taxed twice. First, the corporation pays taxes on its profits, and then the stockholders pay personal income taxes on the dividends they receive from the company’s profits. This is referred to as double taxation.
Other disadvantages include:
- Shareholders can’t write off business losses against personal income
- C corps are more heavily regulated and overseen by government entities
- There are more significant corporate formalities and complex tax rules
- C corps can be more expensive and time-consuming to start and operate
These disadvantages may lead you to decide that a C corporation structure is not the best fit for your business operations. But if you decide to pursue a C corp structure, there may also be ways to reduce your corporate tax obligations. For instance, you could put more business income into retained earnings or pay salaries instead of dividends.
Formation of a C Corp
If a C corp is the right structure for your business, there are several legal steps and requirements to set it up the right way.
Choose a Name
The first step in forming a C corp is selecting a business name. The name must be unique and distinguish the corporation from other registered companies.
Select a Registered Agent
Every C corp must have a designated registered agent responsible for receiving legal papers and official state communications on behalf of the company. An individual can be selected as a registered agent if they have a physical address within the state of incorporation. They must also be available during regular business hours to receive and respond to official communications and notices.
File Articles of Incorporation
Articles of Incorporation are legal documents that contain pertinent information about the company and its creation. These documents legally form the corporation. They must include basic information such as the company name, street address, name and contact information for the registered agent, the amount and type of stock to be issued, and the type of corporate structure.
You also need to determine the state in which to incorporate. Each state’s requirements and forms may differ. Additionally, certain states have more favorable business environments and regulations than others. The Articles of Incorporation must be filed with the Secretary of State’s office in the state where the company will be incorporated. The person filing the articles must also pay a filing fee. Once the state has received and approved the Articles of Incorporation, the company is legally established.
Appoint Directors
Directors help steer the corporation’s direction and make significant decisions for it. Initial directors are usually appointed by the individuals forming the corporation. The first directors will serve until the first shareholder meeting is held and a board of directors is elected.
Create Corporate Bylaws
Bylaws are internal documents that set out the company’s procedures and how a business will operate. Bylaws can also outline the rights and obligations of the shareholders, officers, and directors. Clear, well-drafted bylaws can ensure business continuity and create processes by which owners can manage future conflicts more smoothly.
Hold Initial Meeting
At the initial directors’ meeting, the directors adopt the drafted bylaws, appoint daily officers, and address other important start-up matters. Detailed meeting minutes should be recorded and filed.
Obtain Necessary Permits, Licenses, and Tax Identification
Depending on the state and town or city where your business is located, you may need to obtain local licenses and permits to operate your business. You may also be required to get a sales tax permit to collect tax from customers if your corporation deals in taxable goods or services.
You must also apply for and acquire an employer identification number (EIN). An EIN is a unique federal tax ID number issued by the IRS, so it can quickly identify your business for tax purposes. A business EIN is needed for reporting taxes, opening bank accounts, applying for credit, hiring employees, and operating a corporation.
Maintaining Compliance
Once your C corp is up and running, you must maintain its status and adhere to state and federal rules and regulations. To stay compliant, corporate records must be up-to-date, annual shareholder meetings must be conducted and documented, and all licenses and permits must remain current. In addition, the company must maintain detailed financial records and file tax returns.
When starting a business, selecting an appropriate entity type for the company you seek to run is essential.
Bizee Can Help You Form Your C Corporation
With several different business structures to choose from, it’s essential to understand the differences and the pros and cons in light of your desired business goals. A C corp can be a valuable structure for your company, particularly if you aim to scale up. However, you must also weigh the disadvantages, such as double taxation and regulatory complexity.
Bizee can help you determine if a C corp is right for your enterprise, and guide you through the complex registration process. Bizee has helped over one million entrepreneurs and small business owners form, register, and grow their businesses. Contact Bizee today to learn how we can help kickstart your business.
Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
