If you decided to become a business owner, the first thing you should determine is the type of business entity you want your business to be. C Corporation is the most common type of corporation in the United States as it offers unlimited growth potential through the sale of stocks, which allows you an opportunity to attract wealthy investors. C Corporation is also the best choice if you anticipate your business to grow large. In fact, the majority of larger businesses in the United States are structured as C Corporations, although, theoretically, you can have a C Corporation consisting of just one person.
C Corporation Advantages
• A C Corporation has limited liability. A C Corporation is a separate legal and financial entity, so directors, shareholders, or employees are not responsible for the liabilities of the business. In other words, if your business gets sued, or loses money, your personal assets won’t be affected.
• A C Corporation allows an unlimited growth potential. There is no limit to how high your business stock price can go.
• A C Corporation allows easy access to investments. It is fairly easy for a C Corporation to attract investors, as there can be an unlimited number of investors in the company.
• A C Corporation has no limit on a number of shareholders. But keep in mind that if your business reaches 500 shareholders and $10 million in assets, you will need to register your C Corporation with the U.S. Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934.
• A C Corporation can exist without its owners and is guaranteed a perpetual existence even if the owner leaves the company.
• A C Corporation may have favorable corporate income tax rates. Depending on the state where your business is registered, you may find that your corporate income taxes are lower if you have a C Corporation versus the taxes you would have to pay with an LLC. Also, a C Corporation may be eligible for more tax write-offs than a company operated as an LLC, partnership, or sole partnership
• A C Corporation has credibility. Generally, any business with “Inc.” or “Corp.” after its name has more credibility and trust from its potential clients and investors as they perceive the company as more trustworthy and legitimate.
C Corporation Disadvantages
Before registering your business as a C Corporation, you should also consider its drawbacks:
• A C Corporation is more complex and more expensive to start, as you would need to pay a lot of fees associated with filing the Articles of Incorporation and fees that your corporation needs to pay to the State in which it was registered.
• With C Corporation you need to be prepared for double taxation. If your business is a C corporation it will have to follow a lot of regulations at the federal, state, and local levels, which translates in a lot of extra paperwork, more time keeping track of tax, business, and financial records, preparing corporate bylaws, issuing annual reports, etc.
• With a C Corporation double taxation is inevitable as revenue is taxed at the company level and again as shareholder dividends. As a result, a C corporation will pay corporate income tax, and the owners and shareholders will pay personal income tax on the dividends. To avoid paying double tax, some business owners elect to pay themselves an end-of-year bonus in the same amount that would have otherwise been the company’s profit. Bonuses are considered supplemental wages (and hence, tax deductible for the business), and are taxable to the owners as ordinary income, but bonuses are not taxed to the corporation. Generally, if a C Corporation breaks even, it will typically not have to remit corporate-level income tax. Another way to avoid double taxation is to elect for your C Corporation to be treated as S Corporation for tax purposes.
• You cannot deduct losses on your personal tax returns if your C Corporation reports a financial loss.
HOW TO REGISTER A C CORPORATION
Before registering your company as a specific business entity, it is advisable to speak with a legal counsel and an accountant to determine the best option for you. It is always good to know beforehand all potential pitfalls and liabilities that come with owning a business. Once you weigh all pros and cons and decide that a C Corporation is the best business model for you, you can begin the process to incorporate your business as a C Corporation. This process typically involves the following steps:
1. Choosing a business name. Before you name your business verify that your selected name has not been taken already. To check this, you can conduct an online corporate name search to make sure your proposed name is not issued by another business in your state, and a trademark search that will check that your chosen business name is available in all 50 US states. Note, that in some states the word “Corporation”, “Incorporated”, “Company”, or an abbreviation for one of them is required behind your company name if you register your business as a C Corporation.
2. Selecting a Board of Directors. The main task of the Board of directors is to oversee the activities of your C Corporation and to represent the shareholders.
3. Filing Articles of Incorporation with your state. Articles of Incorporation (also called “Certificate of Incorporation” or “Corporate Charter” by some states) is the formal document filed with a local government to legally record the foundation of a corporation.
4. Writing bylaws. The function of corporate bylaws is to set forth the business’s ground rules for operating the company. The bylaws ensure the management running the business knows how to deal with various situations and responsibilities.
5. Obtaining an Employee Identification Number (EIN) from the IRS. An EIN is also referred to as a “Tax ID Number” or “Federal ID Number”. This nine-digit number is used by the corporation for filing taxes and reporting purposes. Most banks will not open a business bank account for the company if it does not have EIN.
6. Having the first Board of Directors meeting. This first meeting typically covers such important topics as adopting bylaws, setting the fiscal year and selecting a bank, appointing officers, authorizing stock issuance, and other items relevant to starting the C Corporation. The business is required to record all the actions and decisions of the directors in corporate minutes, and all directors must then sign off the minutes.
7. Opening a corporate bank account. A bank account is required for the C Corporation to accept checks and other forms of payment from their clients, pay their vendors and contractors or conduct other financial transactions.
8. Issuing company stock. Having shareholders is an important step for forming a C corporation. A C Corporation should record the names and contact information of each shareholder and also issue certificates of stock ownership in compliance with the laws of its state.
9. Obtaining business licenses and permits required for operating legally. Depending on the type of business, a C Corporation may be required to obtain federal, state, county, or local licenses and permits. You can contact us to find out which permits and licenses your C Corporation needs or check the information online.
10. Submit an initial report if it’s required in your state. This document also called a “Statement of Information,” is a standard requirement for forming a C corporation in California and a few other states.
HOW TO MAINTAIN A C CORPORATION
A C Corporation must be maintained by governing bylaws in compliance with the primary business location. To ensure your C Corporation is in good standing you need to make sure you follow the checklist below:
1. Define the leadership of the corporation by electing the governing body of officers, including President, Vice-President, Secretary, and Treasurer. Typically, the governing body is elected by the Board of Directors.
2. Distribute the shares of your C Corporation (certificates of ownership) and establish its bylaws. The shares in a C Corporation can belong to individuals and in some cases, to other corporations. It is possible that the shareholders already are a part of the corporation when it is formed. However, with a C Corporation, if the business fails the personal assets of the shareholders remain protected.
3. You are required to hold regular meetings of shareholders and operators of a C Corporation. A majority of states require that the owners and management team of a C Corporation hold annual meetings to discuss the state of affairs. The meeting details should be recorded and kept with the corporate records to show business transparency.
4. A C Corporation is required to keep a report of all its business dealings and file it with the State. By filing this information with the state, a C Corporation thus proves to the state that it regularly updates its corporate information.
5. A C Corporation must file and pay corporate taxes annually and report the entity’s income to the IRS.
C CORPORATION COMPLIANCE REQUIREMENTS
For a C Corporation to be in compliance with the government regulations, it should observe certain corporate formalities to remain in good standing with the state. Below are the most common corporate compliance requirements of a C Corporation:
- To hold regular meetings of corporate board of directors
- To hold at least one shareholders’ meeting per year
- To record corporate meetings’ minutes
- Not to commingle personal and corporate assets of owners and company
COST OF FORMING A C CORPORATION
The state filing fees for incorporation can range from $50 to $500 depending on state law. It is recommended to register a C Corporation in the state where you are based. For a small business it is better to start with legal presence in one state before you expand into other states, which will involve registering, paying additional legal fees and taxes in each state where you establish your business.
