Class C-corporation is the default form of corporation. This means that any corporation formed will be a C corporation if it is not converted to an S-corporation.
A C-corporation is one of the most common types of business structure in the U.S. because it offers some important benefits to help a business minimize losses and achieve greater growth. However, it also comes with certain disadvantages.
A C corporation is a business entity that provides unlimited growth potential for a business through the sale of stocks, making it more attractive to wealthy investors. It is also allowed to have as many shareholders as it wishes. Many businesses choose to elect C corporation status because it enables them to limit their financial and legal liabilities. A C corporation pays taxes on its income at the corporate level and its shareholders’ dividends at the individual level. This tax process is also referred to as double taxation.
However, a corporation can opt for “pass-through” taxation by electing S corporation status. An S corporation also protects its owners from personal liability, but it has a number of restrictions. It can only have a maximum of 100 shareholders and issue shares to citizens or permanent residents of the U.S.
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The process of forming a C corp varies from one state to another. Nonetheless, most states require you to undergo the following procedures:
There are several situations in which incorporating as a C Corp may be an advantageous business decision, including recent tax changes to liability. Here are three of the most popular situations:
1. When you desire protection
The limited liability granted to a C-corporation extends to directors, officers, shareholders, and employees. This means if there is debt or a suit filed against the corporation, lawyers cannot go after your personal assets to settle those debts and liability lawsuits. This is a stark contrast to sole proprietorships, in which your money and your company’s money are the same, and if the business is sued, so are you – placing your assets at risk.
2. When you want your business to last
C corporations do not dissolve when an owner leaves the business; they are separate legal entities that can withstand ownership changes. For instance, if two people own a C corp together and one decides to leave, they can sell their shares without closing the business. However, other business entities may dissolve in a similar situation.
3. When you have a limited budget
Many aspiring entrepreneurs who don’t have a large budget to start a business turn to C corporations, as they can raise capital by selling shares of stock. If you have a great business idea and can convince investors of its profitability, you’ll likely receive valuable investments.
A corporation is a specific type of business entity, formed by filing Articles of Incorporation with the state. Corporations have a uniform management structure, limited liability for shareholders, and specific tax filing categories. “Company” is often used generically to refer to any business, as in “My brother and I started our own company”. “Company” can also be used instead of “Inc.” or “Co.” to identify a business as a corporation, as in “The Coca-Cola Company”.
In order to establish an LLC, founders must file Articles of Organization with whatever agency manages business registration in their state(s). These are different from the Articles of Incorporation filed by a corporation. Just like corporations, LLCs must designate a registered agent.
You form a C-corp by filing Articles of Incorporation with the state agency in charge of corporate filing. These articles include the number of authorized shares along with other basic information about the corporation and its incorporating entities. The corporation-to-be must designate a registered agent and reserve a name. Once formed, your new corporation will automatically be taxed as a C Corp. If you have formed an LLC, you can elect C-corp taxation by filing IRS Form 8832.
It’s not uncommon for businesses to begin as an LLC and then elect to be taxed as a C- or S-corp or to fully transition a company structure to a corporate one. Many business owners appreciate the flexibility an LLC affords early on but eventually turn to a corporate structure for its advantages in equity financing. It’s also possible, though less common, to turn a corporation into an LLC. The process for doing this varies from state to state.
Surprisingly, there aren’t that many differences. For example, S-corps begin their existence as C-corps. The conversion to an S-corp occurs by filing IRS Form 2553, Election by a Small Business Corporation, with the IRS, by March 15 of the year that you wish to change your company’s designation to an S-corp. The main differences between C-corps and S-corps have to do with taxes. The profits made through an S-corp are not double-taxed like those made through a C-corp because the S-corp is treated similarly to a partnership or sole proprietorship. However, C-corps have more flexibility around shareholders and the selling of stock, along with the taxes related to certain benefits like health and life insurance.
