What is a C Corporation?
A C corporation (C corp) is one of many different business types to consider. While choosing a structure for your business doesn’t have to be complicated, it's important to gain a complete understanding of a C corp to find out if it's right for you. Continue reading to learn more about the basic structure of a C corp, its pros and cons, and how it compares to other structures.
The Basic Structure of a C Corp
A C corporation is the default structure of an incorporated company. It’s a separate legal entity from its owners with a basic operational structure consisting of shareholders, officers, directors, and employees. Shareholders of C corps select the board of directors. In small companies, it’s possible to have one person serve as the lone shareholder, officer, director, and employee.
Benefits of Forming a C Corporation
Forming a C corporation offers multiple benefits, including:
- Limited Liability Protection. C corporations protect owners, shareholders, officers, directors, and employees from personal liability.
- Independence From Owners. Because a C corporation’s management remains separate from its owners, the business can continue to operate regardless of any ownership or management changes.
- Unlimited Shareholders. C corporations can have an unlimited number of shareholders from anywhere in the world. They also can issue several classes of shares.
- Increased Credibility. Incorporating your company gives it credibility when you conduct business with others or try to obtain financing.
- Wide Range of Expenses and Tax Deductions. C corporations have the widest range of business expenses and tax deductions recognized by the Internal Revenue Service (IRS).
- Investor-Friendly Taxation. Unlike other business structures, C corporation shareholders only have to pay taxes when they receive dividends from the company. This is a major reason investors prefer C corps: they only need to worry about paying tax for the money they actually received.
Disadvantages of Forming a C Corporation
This business structure also poses a few key challenges:
- Required Structure and Increased Regulations. C corporations must follow a strict operational structure while ensuring compliance with numerous regulations at the federal, state, and local levels.
- Increased Fees and Paperwork. Due to the strict structure and regulations imposed on C corporations, they also face more fees and paperwork. Depending on a C corporation’s specific setup, its formation can cost thousands of dollars in addition to ongoing fees for maintaining the corporation. C corporations also tend to spend more money keeping track of taxes as well as business and financial records in order to ensure regulatory compliance.
- Double Taxation. Often the most-cited disadvantage of forming a C corporation, double taxation occurs when a company has a profit left at the end of a year and distributes it as dividends to its shareholders. While the C corporation already paid taxes on the profits, shareholders must now declare the dividends as income on their personal taxes and pay tax at their own personal rate.
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LLC vs. Corporation
When deciding to form your business, it’s important to assess which structure best suits you. Both limited liability companies (LLCs) and corporations have benefits and disadvantages.
One benefit they both offer is limited liability; in both structures, the company becomes a separate legal entity from its owners.
Two of the main distinctions between LLCs and corporations involve management and taxation. LLCs have greater flexibility in their management structure, while corporations must follow a strict order of management with a board of directors handling management responsibilities.
As noted before, corporations benefit from a wider range of tax deductions while also facing double taxation on shareholder dividends. In contrast, LLCs benefit from pass-through taxation. This means any income or loss is not taxed at the business level, but “passes through” to the individual owners and taxed at their personal tax rate.
One reason you may prefer to set up a corporation instead of an LLC is that it’s easy to transfer corporate shares from one owner to another. This can be a good choice for a business that anticipates having outside investors or making its stock publicly available. In contrast, the owners of an LLC may include individuals, corporations, and/or trusts.
From a legal perspective, corporations have many precedents and case laws stemming from their existence throughout U.S. history. LLCs, on the other hand, are a relatively new business structure treated differently from state to state. While many business owners don’t view this as a major factor in deciding how to structure their company, it may be important to some.
What’s the Difference Between a C Corp and an S Corp?
The main difference between a C corporation and an S corporation is how they’re taxed. Similar to LLCs, S corporations benefit from pass-through taxation. As a result, S corporations typically work best for smaller companies. Other key differences include:
- Domestic Corporation Requirement. An S corporation must be a U.S.-based company.
- Domestic Ownership Requirement. Unlike C corporations, S corporations cannot have foreign owners. Its owners must be U.S. citizens or legal residents, which means S corporation owners cannot be other corporations.
- Limited Shareholders. S corporations may have up to 100 shareholders.
- Limited Stock Classes. S corporations can offer only one class of stocks.
Overall, C corporations have more flexibility regarding ownership and stocks while facing more tax ramifications.
What Are the First Steps in Forming a C Corp?
To form a C corporation, you’ll need to complete these key steps:
- Choose a Name. Pick a unique name for your company, and be sure to include “Inc.,” “Incorporated,” or “Corporation” in the name.
- Select Your Board of Directors. After choosing a business name, you’ll need to appoint a board of directors to represent the shareholders, oversee business activities, and make decisions for the company.
- File Your Articles of Incorporation. File this set of formal documents with the state in which you wish to incorporate to make your business a legal entity.
- Pay the Filing Fee. When you file your Articles of Incorporation, you’ll need to pay any required state filing fees.
- Draft Your Corporate Bylaws. Next, you should draft your corporate bylaws. Your bylaws will include:
- Basic information about the corporation
- Number of board of directors
- Voting procedures
- Number and types of shares
- Annual meeting procedures
- How board meetings will be conducted and how often
- Information about corporate board officers and their duties
- The fiscal year of the corporation
- Financial audits
- Set First Board of Directors Meeting. Conduct a meeting with your board of directors to approve the bylaws, along with other items of business, such as the following:
- Resolving to open a bank account
- Electing officers and setting their salaries
- Issuing shares of corporate stock
- Anything else that may need to be addressed in the first meeting.
- Issue Stock Certificates. Stock certificates divide your company into percentages among the owners. Nowadays, most companies no longer issue paper stock certificates, but digital certificates can be issued. Some states may not require you to issue stock certificates, but they can still be a good idea. It gives shareholders comfort in providing proof of their ownership. Stock certificates also clearly state voting rights, transfer rights, and other rights and exclusions to which the owner is entitled. Therefore, certificates can ensure the enforceability of these rights and exclusions.
- Apply for Appropriate Licenses. Next, apply for all necessary business licenses required by the state in which you incorporate your company. Be sure to identify and apply for any other licenses required by the industry in which you’ll operate and by your local government.
- Apply for an EIN. Whether or not you have employees, you must secure an Employer Identification Number (EIN). This is your corporate tax identification number. You’ll also need this to open a business bank account or apply for a loan.
As with any business entity, there are advantages and disadvantages to consider when deciding whether or not to incorporate your business. Think of your long-term goals, business type, tax structure, and record-keeping requirements. This will help you determine the best structure for your business.