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Forming Your C Corporation
An overview of what a C corp is, the advantages and disadvantages, and how to incorporate
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Since the 1980s, the number of C corporations has diminished while the total number of pass-through businesses such as S corporations, partnerships, and sole proprietorships has tripled. However, there are still about 1.7 million C corps in the U.S. according to the Tax Foundation.
The C corporation is often overlooked as a viable path to incorporation for the aspiring small business owner, with most entrepreneurs primarily considering only a limited liability company (LLC) or an S corporation. However, deciding to form a C corp can offer certain advantages that other entity types cannot.
On this page, we’ll provide a basic overview of C corporations — including what a C corp is, its pros and cons, as well as how to form one. So let’s get started…
Why form a C corporation?
C corporations best serve owners who want the limited liability, the ability to reduce overall income taxes, and more easily raise capital.
Taxation
C corporation shareholders don’t report any of the business income and expense on their individual tax return. The corporation files its own tax returns and pays its income taxes — generally, at a lower tax rate than an individual would.
Meanwhile, the individual shareholders report and pay personal income taxes only on income paid to them by the corporation. In this way, corporations can reduce owners’ self employment taxes. Since tax rates are lower for corporations, owners can divide profits and accumulate more in the corporation than is possible with pass-through taxation.
Another tax advantage of C corps is you can enjoy tax-deductible business expenses. Plus, corporations are normally audited less frequently than sole proprietorships and partnerships.
It should be noted that shareholders are required to pay income taxes on income from dividends paid by a C corp, even if income taxes have previously been paid by the corporation.
Limited liability
C corporation shareholders enjoy limited liability for the debts, obligations, and liabilities incurred by the business as well as liability stemming from possible legal action. This protection of shareholders’ personal assets is one of the major reasons why business owners choose to incorporate.
Normally, shareholders cannot lose more than the amount they invested in the corporation. If the corporation goes bankrupt, the shareholders will not be held personally liable for its debts. Or should someone sue the corporation and the corporation is found liable, they can take the corporation’s property to satisfy the judgment but not the shareholder’s personal assets (i.e. home, car, bank account, etc.).
An exception to a shareholder’s limited liability happens when the corporation has recklessly harmed people or has been used to perpetuate a fraud. In such rare cases, the owner may be held liable regardless of the entity type.
Employees, owners & shareholders
Most employees prefer to work for a corporation that can offer them stock options and stock bonuses.
Also, owners working in a C corp business are considered employees and therefore eligible for certain fringe benefits such as group insurance plans, retirement & profit sharing plans, tax-favored stock option, and bonus plans.
Lastly, shareholders can freely sell their shares in a C corporation and ownership can be easily transferred by selling stock in the corporation.
Raising capital
Businesses tend to have an easier time attracting venture capitalists, investors, and bank financing when they’ve formed as a corporation. In fact, with C corps, it can be easier to get additional capital than with other types of business since you can issue and sell stock, or a variety of other financial instruments, as evidence of interest in the corporation.
Also, certain investments in S corporations or LLCs are banned because of restrictions in their own governing documents and the tax laws, opening up more opportunities for C corps looking to raise capital.
Perpetual existence
In a sense, a corporation is immortal and perpetual since it doesn’t end with the death of a shareholder owner, as do some of the other business types. A C corp business continues on indefinitely, even if the owner leaves the company or passes away.
Public credibility
The general public normally thinks of corporations as being more substantial than sole proprietorships and partnerships, meaning forming a C corp can help you gain respect and credibility — not just among the public, but among suppliers and lenders as well.
1. What is a corporation?
A corporation is a business entity formed by filing official documents with the appropriate state.
Corporations are one of two types: C corporations and S corporations. A corporation is a standard corporation, called a C corporation, unless and until the shareholders elect special “pass-through” tax status with the Internal Revenue Service (IRS) by filing an IRS Form 2553.
Except for a few special requirements, their tax status is the only difference between the two.
The law recognizes a corporation as an individual entity, separate from its shareholders (owners), and is many times treated as a human being.
Its most important characteristic is that shareholders, directors and officers enjoy limited liability for the business’s debts, obligations and liabilities, as well as liability stemming from possible legal action.
Protecting shareholders’ personal assets is one of the primary reasons business owners choose to incorporate.
Typically, shareholders cannot lose more than the amount they invested in the corporation. If the corporation goes bankrupt, the shareholders will not be liable for its debts.
Should someone sue the corporation and it is found liable, they can take the corporation’s property to satisfy the judgment, but if that property does not meet the judgment, they will not be able to take a shareholder’s personal assets, i.e., home, car, or a bank account.
An exception to a shareholder’s limited liability exists when the corporation has recklessly harmed people or has been used to perpetuate fraud.
A corporation best serves owners who want both limited liability and a more formal business structure.
2. What is the difference between a C corporation and an S corporation?
The most important difference between a C corporation and an S corporation is how they are taxed.
C corporation shareholders do not report any business income and expenses on their tax returns.
The corporation files tax returns and pays its income taxes (at generally lower tax rates than would individuals), while the individual shareholders report and pay personal income taxes only on what may have been paid to them by the corporation.
On the other hand, an S corporation is not subject to income taxes, filing only an informational tax return. All profits, losses, credits, and deductions pass through to the shareholders who report these items (based on their percentage of ownership) on their personal tax returns.
It should be noted that C corporation shareholders are subject to “double taxation” since they must pay income taxes on income from dividends paid by the corporation even though it previously paid income taxes.
However, since tax rates are lower for corporations, C corporation owners can (by dividing profits) accumulate more in the corporation than is possible with S corporations.
Another relatively minor difference between C corporations and S corporations is that a few special restrictions apply to S corporations.
S corporations can have no more than 100 shareholders. While voting rights can differ, they can have only one class of stock. Their shareholders cannot be other corporations, Limited Liability Companies (LLCs), partnerships, certain trusts, or non-resident aliens.
And there can be some limitations on the kind of business they are allowed to conduct.
How you want to be taxed is the primary consideration when choosing between a C corporation and an S corporation.
Difference between C corp and S corp
Read our in-depth guide on Difference between C corp and S corp.
Choosing the right corporate structure is crucial for your business. This guide compares C corporations and S corporations, focusing on key differences and eligibility requirements.
3. How is a corporation structured?
A corporation is owned by its shareholders. A Board of Directors, elected by the shareholders, meets regularly to decide how the business is run collectively.
They manage the business, making decisions concerning policy, personnel, compensation, dividends, and the like. Appointed by and under the direction of the Board of Directors, the corporation’s officers handle day-to-day business operations.
The officers, typically including a President, Vice President, Secretary, and Treasurer, can legally bind the corporation.
4. What are some of the advantages of a corporation?
- A corporation’s primary and most significant advantage is that shareholders, directors and officers enjoy limited liability for the debts, obligations and liabilities of the business, as well as liability stemming from possible legal action.
- A corporation can raise additional capital more easily than most other types of business since it can issue and sell stock or a variety of other financial instruments as evidence of interest in the corporation.
- Ownership can be easily transferred by selling stock in the corporation.
- Employees frequently prefer to work for a corporation that can offer them stock options and stock bonuses.
- Unlike some other business types, a corporation is designed to be perpetual, meaning it does not automatically end upon a shareholder’s death. However, a corporation can be voluntarily dissolved by its shareholders or involuntarily dissolved by legal action. Additionally, corporations can face bankruptcy.
- Corporations are typically audited less frequently than sole proprietorships and partnerships.
- Owners working in the business are employees and are therefore eligible for certain fringe benefits such as group insurance plans, retirement and profit-sharing plans, and tax-favored stock options and bonus plans.
- The general public usually considers corporations more substantial than sole proprietorships and partnerships.
5. What are some of the disadvantages of a corporation?
- Official documents, typically called a Certificate of Incorporation or Articles of Incorporation, must be filed with the appropriate state to form a corporation.
- State filing fees must be paid.
- Regulations and requirements for operating a corporation are stricter and more complex than those of other business entities. For example, they are required to elect officers, document important decisions, and hold and keep minutes that record mandatory meetings of stockholders and a board of directors.
Disadvantages to forming a C corporation
Every type of business entity has its disadvantages, as well as its benefits. Here’s a list of the main cons of forming a C corporation:
- C corps have more legal formalities than other types of entities. For instance, they must have a board of directors and officers in addition to the shareholders. You must also hold and keep minutes that document the meetings of the stockholders and board of directors.
- The sale of stock is sometimes subject to state and federal securities laws.
- Official documents (typically called a Certificate of Incorporation or Articles of Incorporation) must be filed with the appropriate state government office.
- Shareholders may face double taxation as they are required to pay personal income taxes on dividends paid to them by the corporation. However, there are ways to reduce or eliminate double taxation. Talk to your tax advisor for advice.
- State filing fees must be paid. These fees vary by state and range from $50 to $725.
- There can be some limitations as to the kind of business a corporation is allowed to conduct.
As you can see, there are clear pros and cons to incorporating your business as a C corporation. Next, you’ll want to consult your accountant and/or attorney to discuss whether this entity type is truly a good fit for your business and future goals.
6. Do I need a business attorney to form a corporation?
No. Formation of a corporation is primarily a clerical process, and although it is relatively complicated, anyone who understands and follows the required procedures can form a corporation.
MaxFilings provides business incorporation services for substantially less than the amount charged by most attorneys. We can and do guarantee the accurate formation of a corporation, but our service is not intended to serve as a substitute for professional advice.
Since individual situations and state statutes vary, you may need to seek more detailed advice from your local CPAs or accountants familiar with your specific requirements and those of the state in question.
Since taxes are a prime consideration, consulting with your accountant or tax advisor is important.
7. In which state should I incorporate?
While you can incorporate in any state, your home state is likely your best choice – assuming you will be “doing business” there.
That’s because corporations must register as a “foreign corporation” (paying fees and taxes) in every state where they do business, other than their state of incorporation.
But suppose you will not be doing business in your home state. In that case, you may want to incorporate in another state because of its lower state fees and corporate income taxes or because of its favorable business climate.
Delaware has long been recognized as a state where most major publicly held companies are incorporated.
Nevada, a state that has no corporate income taxes, is also a popular pro-business state.
8. What are articles of incorporation?
The “articles of incorporation” refers to the document that sets forth the information about a corporation that is required by the laws of the state in which the corporation is formed.
Some of that information will be included in the public record. Articles of incorporation, certificate of incorporation and charter are often used interchangeably.
9. What is an incorporator?
The incorporator is the individual filing the articles of incorporation. The incorporator’s duties end when the corporation is formed.
10. What are bylaws?
Adopted by its shareholders, the bylaws of a corporation establish detailed standing rules that govern the corporation’s internal affairs.
11. What is the board of directors?
With few exceptions, states require corporations to have a board of directors – individuals who manage the corporation’s business and affairs.
The shareholders elect a corporation’s board of directors and meet regularly to collectively make decisions concerning policy, personnel, compensation, dividends, and other issues that determine how the business is run.
The corporation’s officers manage the business’s day-to-day operations as directed by the board of directors.
12. How many directors are necessary?
All states allow a corporation to have one or more directors. A few states say that a corporation can have one director only if it has just one shareholder, but if it has two shareholders, it must have at least two directors, and if it has three shareholders, it must have at least three directors.
13. What are the officers of a corporation?
A corporation will have the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws. Officers normally include a president, vice-president, secretary, and treasurer.
The corporation’s officers hold the authority to perform the duties outlined in the bylaws or, to the extent consistent with those set forth by the board of directors or an officer authorized by the board of directors to prescribe the duties of other officers.
One of the officers is usually designated responsible for preparing minutes of the board of directors and shareholders meetings and authenticating the corporation’s records.
Most states allow the same person to hold more than one office in a corporation simultaneously.
14. What are authorized shares?
A corporation’s Articles of Incorporation specify the maximum number and type of shares the corporation is authorized to issue. Since corporations do not have to issue the number of shares authorized, Issued Shares can be fewer than, but never more than, the Authorized Shares.
A corporation would have to have issued at least one share of stock.
In some states, the number of authorized shares can affect fees and taxes.
15. What is par value?
Par value is the assigned value of a share of stock. Stock does not have to have a par value, and corporations frequently have No Par Stock, which has no assigned value.
A stock’s par value does not represent the actual value of a share, but it is the minimum amount for which a share can be sold. In some states, par value can affect fees and taxes.
16. What is a dividend?
A dividend is a share of a sum paid to shareholders by a corporation out of the corporation’s earnings. Dividends are typically paid in cash or stock.
Unlike interest on loans, dividends are not a deductible expense to the corporation, although they do represent taxable income to the shareholders.
17. What is a DBA – Fictitious name?
In most states, a corporation can operate under names in addition to the corporate name. Such a name, often referred to as a fictitious name, assumed name, or trade name, can be made official by filing a DBA (doing business as) with the appropriate state and/or local jurisdiction.
18. What is a registered agent? Must I have one?
Yes, all corporations are required to have a registered agent. A registered agent is a person registered with the state of incorporation authorized to receive legal papers on behalf of the corporation.
They are normally listed with the Secretary of State and must be located in that state and available during regular business hours.
While anyone can serve as a corporation’s registered agent, most choose to have a professional registered agent since it is extremely important that all legal documents, tax documents, annual reports, and correspondence with the state and regulatory agencies be handled promptly and efficiently.
19. What is a corporate kit?
A corporate kit includes many things to help you comply with state rules and regulations regarding documentation and record keeping.
Corporations must hold and keep a record of initial and then annual meetings of the board of directors and shareholders. Stock or membership certificates must be issued to corporation shareholders, and a record of the owners must be maintained.
A metal seal is used to make an official impression identifying the company on official documents.
20. What is a Federal Tax Identification Number (EIN)?
Every corporation is required to have a Federal Tax Identification Number, also known as an employer identification number (EIN), used to identify the business in any number of transactions.
An EIN is obtained by submitting IRS Form SS-4 to the Internal Revenue Service. Your EIN will be needed to open a bank account.
How to form a C corp
If you decide that incorporating as a C corporation is the right step for your business, then it’s time to decide where you’re going to incorporate. Most experts advise establishing a corporation in your home state; however, there may be times when there are tax advantages of incorporating in a different state.
Once a state is chosen, you’ll have to make sure you obey the state’s corporate laws and register your business name (typically with the secretary of state). You’ll also need to file official documents and pay the state filing fee. Finally, you must draft corporate bylaws and hold a meeting with your board of directors.
Should you form a C corp?
At MaxFilings, we can help you select the incorporation type that best suits your business needs. Continue browsing our website to learn more about the difference between C corps and S corps as well as see our business entity comparison chart.
And finally, when you’re ready to get started, select your preferred entity type below to incorporate today.
See the full range of features, benefits, and pricing tailored to your needs.
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