C Corporations are a powerful option for companies of all kinds. Are you considering starting a business or restructuring one? Understanding this business type is in your best interest. It can help you choose the right option for your needs.
This can work for multiple types of businesses. It can support those dreaming of going public or those focusing on protecting their personal assets. Learn how this business structure can protect your finances and attract serious investors.
What is a C Corporation?
A C Corporation is separate from its owners. This means the corporation is responsible for the company's obligations. This separation is the "corporate veil." That provides a layer of protection between the business and its shareholders.
These are some other factors that make C-corps different from other business types:
Tax treatment: Tax is one thing that defines a C-Corp. A C Corporation is taxed as its own legal entity. This is different from other business types. It also leads to double taxation.
Ownership structure:C Corps have shareholders who own the company. That happens through their stock holdings. There's no limit on the number of shareholders.
Perpetual existence:A C Corporation continues to exist independently of its owners. This means the company can continue operating after leadership changes even if shareholders change or pass away.
Benefits of forming a corporation
Forming a corporation comes with benefits. These can make it an attractive option for certain types of ventures. Take a look at those benefits.
1. Limited liability protection
One of the biggest advantages is the limited liability protection. However, this protection isn't absolute. In cases of something like fraud, you could still be held responsible. This can open the door to personal liability.
For example, one Michigan statute states the effect of lack of formalities. The failure of a limited liability company to observe formalities relating exclusively to the management of its internal affairs is not a ground for imposing liability on the members, managers, or governors for the debts, obligations, or other liabilities of the company.
2. Potential tax benefits
While C Corps are subject to double taxation, they also offer certain tax advantages like:
Deductible expenses: C Corps can deduct many expenses. This can reduce taxable income.
Lower corporate tax rate: The current corporate tax rate is 21%. That may be lower than individual tax rates, especially for people with a high-income tax rate.
Tax-free benefits: C Corps can offer tax-deductible benefits for the corporation. They may also be tax-free for employees.
3. Increased credibility
Becoming a C corporation can enhance your company's credibility with potential customers and investors. The formal structure and reporting requirements of a C corporation often signal a level of professionalism, which can increase confidence in the business.
This is important, as 90% of business executives think customers highly trust their companies while only 30% of consumers actually do. That gap of 60 percentage points is greater than the 57 points we saw in both 2023 and 2022.
4. Ability to raise capital
C Corps have a unique advantage when it comes to raising capital. They can issue different classes of stock. This flexibility allows C Corps to:
- Issue common and preferred stock with different voting rights
- Attract venture capital and angel investors
- Potentially go public
This may not be an important factor if you intend to be a small or self-funded operation. However, it can make a difference if you have bigger plans for the business. It makes gaining access to funds easier.
5. Flexibility in ownership
C Corps offer flexibility with ownership structure. This allows companies to:
- Easy transfer of ownership through the buying and selling of shares
- Bring in a range of investors
- Accommodate different investor needs
That flexibility can have many benefits over the life of the business. It also distributes the opportunities and the burdens that come with the business. This makes it a good option for those who value being a part of a team.
Key features of a C Corporation
Considering forming a C Corp or looking to better manage an existing one? Consider these factors that influence the way they run.
1. Corporate governance
C Corporations have a formal governance structure. That includes a board of directors responsible for major decisions. Officers manage day-to-day operations. In contrast, shareholders have voting rights but may not participate in management.
2. Formal record-keeping requirements
C Corps are required to maintain detailed records, including activities like
- Annual meetings
- Meeting minutes
- Stock ledger
- Financial records
These requirements can create a lot of administrative work. But they provide a level of transparency. They can also be valuable for decision-making and resolving disputes. All businesses have a lot of control over how they choose to maintain these records.
According to the IRS, you may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
3. Tax treatment
The corporation must pay tax on profits, and shareholders also pay taxes on dividends. Banks and other financial institutions use Form 1099-DIV to report dividends and other distributions to taxpayers and the IRS.
These are effectively two different kinds of taxes corporations have to deal with. This combination leads to double taxation for this type of business, making tax planning strategies even more important.
How C Corporations work
What goes into creating a C-corp? These are the elements that make it possible
1. Formation process
The first step is picking your business name. Your name must be unique to your state. Do a search to see if the name you want is already taken. You may be able to reserve a name. But this usually comes with an additional fee.
2. Filing Articles of Incorporation
The Articles of Incorporation make your business official. The document includes:
- Corporation name
- Business purpose
- Registered agent
- Number of authorized shares
- Par value of shares
Make sure you get this information right. Otherwise, your filing may get rejected. In Florida, the Division of Corporations is required to examine your document for minimum statutory filing requirements. If you received a rejection notice, then your application failed to meet one or more of those requirements.
3. Issuing stock
After filing and approval, you can issue stock. You’ll need to decide how many shares each initial shareholder will get. Then keep a ledger of the corporation's stock transactions. This way, you can refer back to it if needed.
4. Getting an Employer Identification Number
An Employer Identification Number (EIN) is the corporation's tax ID. This number is essential for many purposes. The IRS uses it to identify the business. You'll need an EIN before you can:
- Open a business bank account
- File corporate tax returns
- Hire employees
5. Building a board of directors
The board handles the corporation's affairs. To create the board, you’ll need to:
- Hold an organizational meeting
- Elect directors
- Appoint corporate officers
6. Creating corporate bylaws
Corporate bylaws govern how the corporation operates. Bylaws usually include things like
- Number of directors
- Officer roles
- Stock issuance details
- Indemnification provisions
- Conflict of interest policies
Well-drafted bylaws help prevent future conflicts. For example, you can sort out how disagreements will be handled. A clear path for conflict resolution can make a difference. It can help you avoid time-consuming mediation.
8. Getting licenses and permits
Your business may need licenses and permits. These could include:
- General business license
- Professional licenses
- Zoning permits
- Health permits
- Environmental permits
For example, in Arizona, a transaction privilege tax (TPT) license (commonly referred to as a sales tax, resale, wholesale, vendor or tax license) is required for businesses selling a product or engaging in a service subject to transaction privilege tax in the state.
Operational requirements for C Corps
Once your C Corporation is formed, there are operational requirements. You’ll need to focus on these to maintain your status.
1. Hold meetings
C Corporations need to have meetings with different parties. This includes shareholders and directors. Shareholders review financials in these meetings. They also vote on major decisions. Directors' meetings may be held more frequently to support operations.
2. File reports and disclosures
Most states require C Corporations to file annual reports, which typically include:
- Basic corporate information
- Names and addresses of directors and officers
- Number of issued shares
Some states require additional financial disclosures. Not filing can lead to penalties. It could even lead to the end of the corporation in extreme cases. Pay close attention to the requirements in your location.
For example, effective July 2024, the state of Connecticut has new disclosure requirements around funding. A provider shall provide to a recipient when the provider extends a specific offer for sales-based financing, the following disclosures in a format prescribed by the Banking Commissioner:
- The total amount of the commercial financing
- The disbursement amount, which is the amount paid to the recipient or on the recipient's behalf, excluding any finance charges that are deducted or withheld at disbursement
- The finance charge
- The total repayment amount, which is the disbursement amount plus the finance charge
- The estimated time period required for the periodic payments to equal the total repayment amount
3. Maintain compliance
To preserve limited liability protection, you need separation between the business and its people. This includes:
- Keeping corporate and personal finances separate
- Conducting business in the corporation's name
- Documenting all major corporate decisions
- Ensuring capitalization
C Corp vs. S Corp vs LLC: What's the difference?
Understanding how C Corporations compare to other structures is important. It can help you make an informed decision. This is what you need to know about how C-Corps stack up.
Taxation
C Corporations face "double taxation," where the corporation pays taxes on its profits, and shareholders also pay taxes on dividends. In contrast, S Corporations use a "pass-through" taxation model where business income and deductions pass through to shareholders and are reported on their individual tax returns. LLCs and sole proprietorships are also typically taxed as pass-through entities, but LLCs have the flexibility to choose to be taxed as a C Corporation if it better suits their needs.
Ownership and shareholders
C Corporations have few restrictions on ownership. They can have unlimited shareholders and issue multiple classes of stock, which can attract a broader range of investors. S Corporations, however, are limited to 100 shareholders, and those shareholders must be U.S. citizens or residents. Additionally, S Corporations can only issue one class of stock.
LLCs offer a flexible ownership structure but come with certain restrictions. Unlike corporations, LLCs are not limited to 100 owners, nor do they have to be U.S. citizens. However, they cannot go public, and many states impose restrictions on the types of businesses that can be LLCs. An LLC can have multiple owners (known as "members"), who can be individuals, corporations, or even other LLCs, allowing for a more adaptable management and ownership structure.
Formalities and compliance
C Corporations must adhere to strict requirements for record-keeping, governance, and reporting, including holding annual shareholder meetings and maintaining detailed corporate minutes. S Corporations have similar requirements to maintain their special tax status. LLCs, while still needing to maintain separation between business and personal assets, generally have fewer formalities to follow. This can make LLCs more attractive for small business owners who want the liability protection of a corporation but with more operational flexibility.
Drawbacks of a C Corp
C Corporations offer many advantages. B they also come with certain drawbacks. These are some of the ones you should know about.
Taxes
The business pays corporate income tax. Shareholders pay through their personal tax returns. This can result in a higher tax burden. Especially when you compare it to other business types. This is not the best financial decision for all ventures.
Increased regulatory requirements
There are more requirements for C-Corps to stay in good standing. These requirements can be time-consuming. This can also increase operational costs if you hire professional assistance to help with these tasks.
Inflexibility
Once established as a C Corp, changing to another business structure can be complicated. For example, converting to an LLC or partnership can trigger tax liabilities. This lack of flexibility can be a challenge if business needs change.
Potential for shareholder conflicts
Shareholders may have different goals for the company. This can slow down the decision-making process. It may also lead to disagreements and legal disputes. You need to consider the best way to manage that.
When to form a C Corp
Choosing the right business structure is a decision that matters. It can have long-lasting implications for your company. Here are some indicators a C Corp might be the right move.
1. Plans to raise capital
A C-Corp is a good option for businesses that need to raise funds. C Corps can issue different classes of stock. This can be attractive to many investors. This can speed up the growth process.
2. Desire for stability
C-corporations continue to exist when changes in ownership or management happen. Shares can be bought and sold without much disruption. That supports smooth transitions between leaders.
3. Need for more structure
A C corporation structure would benefit a business with international investors or one that wants to create a tiered ownership structure. C Corporations can have foreign shareholders, and other corporations can own shares in a C corporation, which isn't allowed in S Corporations.
4. Wanting protections in high-risk industries
For businesses operating in industries with liability risks, protection is important. In C-Corps, shareholders' personal assets are considered separate. The liability protection can make it easier to attract top talent. Especially in spaces like healthcare or finance.
5. Offering comprehensive employee benefits
C Corps can deduct the cost of employee benefits like health insurance and retirement plans. This can help bring even more people into the organization. It may also have a positive impact on company culture.
Research shows that insurance coverage for mental health services is one of the most important benefits. However, employees also value flexible PTO options and opportunities for upskilling.
6. Having international operations
The C Corp structure is recognized and respected internationally. C Corps can easily establish subsidiaries or branches in other countries. This empowers brands to expand their presence across the globe.
7. Defining a long-term business vision
A C-corp can continue indefinitely. The business entity that can be passed down or sold. This makes it possible to focus on and build lasting relationships. It also powers more strategic investing and decision-making.
12 steps to Create a C Corp
Ready to turn your idea for a C-Corp into reality? Follow these steps to do just that.
1. Select your state of incorporation
Where do you want to do business? Consider factors like state corporate laws and filing fees. Make sure you understand how you’ll fit into the market. You should also start researching names.
2. Appoint a registered agent
Who will accept legal documents on behalf of your corporation? You can act as your own registered agent. But using a professional service can provide privacy. It can also ensure you don't miss important documents.
3. File Articles of Incorporation
Prepare and file this document with all the required information. See what you’ll need in the state where you plan to do business. You’ll also pay filing fees at this point. This can usually be done in person or online.
4. Create bylaws
Outline the internal rules governing your corporation. Include things like the roles of officers and how shares of stock will be issued. You may consider working with a lawyer. This way your bylaws will be comprehensive and compliant with state laws.
5. Hold your first board meeting
Conduct an organizational meeting. During it, focus on tasks like adopting bylaws and electing officers. Make sure you keep detailed minutes of this meeting. Also, be aware that it can set the tone for the future.
6. Issue stock certificates
Determine how many shares to issue to each shareholder. From there, you can create and distribute stock certificates. Make sure to record stock issuances and transfers. Consult with a securities lawyer if you're not sure what’s required.
7. Get an EIN
You’ll need an EIN. This is necessary for tax purposes. You also need it to open a business bank account. It’s easy to apply online for free. You can do this through the IRS website. You’ll receive your EIN right away.
8. Open a corporate bank account
At this stage, you can open a business account. This keeps corporate funds separate from personal funds. There are many options available. You may shop around to find a bank that suits your small business needs best.
9. Obtain licenses and permits
Make sure you have any business licenses you may need. Also, consider industry-specific permits or certifications you may need. Remember that the requirements can vary based on your location.
10. Comply with tax requirements
How will you handle state and local taxes? Understand your obligations for estimated tax payments. All federal taxes for businesses and can be paid using EFTPS. But payments must be scheduled by 8 p.m. ET the day before the due date to be timely.
Once you determine how you want to manage taxes, set up a system to track this. This way, you can avoid issues and fines. Consider working with a tax professional, too. This may help you optimize your tax strategy.
11. Establish corporate records
Your important corporate documents should always be accessible. Consider different ways to manage that. There are many ways to organize, so find what works best for you. Also, consider having digital copies.
It’s time to start your C Corp
Forming a C Corporation is exciting. However, the structure can have many implications for your business. Understanding each step and carefully considering your options is important. It can set your business up for a successful future.
Use this guide to work through the formation process. Be sure to align your choice with your goals. This way, you can make the best choice right away, freeing you up to focus on what you do best.
