C Corporation (C Corp) Formation

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.

What Is a C Corp?

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.

Structure of a C Corp

Every C corporation must have the following positions

  • Shareholders – The shareholders own the stock of a corporation. They are responsible for appointing a board of directors, making amendments to the articles of corporation and bylaws, and approving important actions such as the sale of corporate assets and mergers. Only the shareholders can dissolve the corporation.
  • Directors – The directors are the ones who manage the corporation. Their responsibilities include issuing stocks, appointing officers, and making major business decisions.
  • Officers – A corporation is also required to have a president, treasurer, and secretary. These officers are in charge of their day-to-day operations.
  • Employees – Employees perform a wide range of duties to keep a corporation running and are paid a salary for their work.

Advantages and Disadvantages of forming a C Corp

Benefits of a C Corporation

  • Limited liability for shareholders, directors, executive officers, and employees.
  • Perpetual existence even after the owner or founder leaves the company.
  • Greater credibility with vendors and lenders.
  • Unlimited potential for growth because of unlimited shares.
  • An unlimited number of shareholders.
  • Tax-deductible business expenses.

Drawbacks and Limitations

  • Double taxation with revenue being taxed at the corporate level and again at the individual level as shareholder dividends.
  • Expensive to form as the filing of the Articles of Incorporation comes with high fees.
  • More regulations and formalities because a C corporation’s complex tax process and liability protection draw more scrutiny from the government.
  • Cannot write off corporate losses.
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Frequently Asked Questions

The process of forming a C corp varies from one state to another. Nonetheless, most states require you to undergo the following procedures:

  1. Select a legal name for your corporation – The name you choose must not be the same as that of another existing business. Also, it must end with the abbreviation “corp.,” “inc.,” or “ltd.”
  2. Draft and submit the Articles of Incorporation to the Secretary of State – The Articles of Incorporation typically include information such as the name and address of your corporation, nature of your business, name of registered agent, and corporate by-laws.
  3. Provide stock information – Such information includes the number of initial authorized shares, number of stock classes, and per-share value.
  4. Obtain an Employer Identification Number (EIN) – Get an EIN either by filing Form SS-4 or applying online at the website of the IRS.
  5. Apply for tax identification numbers – Obtain identification numbers that are required in your state or county for paying certain taxes, such as unemployment, disability, and other kinds of payroll taxes.
  6. Pay sales taxes – If you are planning to collect sales taxes on the products or services you sell, you may be required to pay sales taxes. Check with the tax authority of your state to find out. 
  7. Get the necessary licenses and permits – Depending on the nature of your business, you may have to obtain a license or permit to conduct business legally.
  8. Purchase insurance – Although a C corporation provides liability protection for its shareholders, it is important to have adequate insurance to protect your business assets.

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.

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