A C Corporation, also referred to as a general for-profit corporation, is a legal, taxable entity, separate from its owners.
Benefits of Forming a C Corp
Limited Liability Protection for Shareholders
A C Corporation’s shareholders’ personal liability is limited to the amount they have individually invested in the company. In contrast, owners of a sole proprietorship or partnership are personally liable for business debts and legal issues.
C Corporation Tax Flexibility
Default Tax Treatment for a C Corp – A C Corporation is a tax-paying entity; so when it makes a profit, it will be taxed on that income. You’ll often hear a C Corp’s income tax treatment referred to as “double taxation.” because first, the corporation pays taxes on its profits, and then the individual shareholders pay taxes on the dividend income they receive from the business. Note that dividend payouts to shareholders are not a deductible expense for the corporation. To avoid double taxation, some business owners choose to pay themselves a bonus at the end of the year in an amount that would have otherwise been the company’s profits. Because bonuses are considered supplemental wages (and therefore deductible for the business), they are taxable to the owners as ordinary income, but they are not taxed to the corporation. When a C Corporation breaks even, it will typically not have to remit corporate-level income tax.
S Corporation Election – Another way a corporation can avoid double taxation is to elect to be treated as an S Corporation for tax purposes. As an S Corp, the company’s profits and losses flow directly to their shareholders’ personal income tax returns. Owners’ salaries are subject to self-employment tax, but profit given to shareholders as distributions are not.
In many circumstances, a C Corporation pays taxes at a lower federal income tax rate than the individual income tax rates applicable to sole proprietorships and partnerships. Therefore, business owners who plan on investing earnings back into the business often prefer the C Corporation structure as a way of deferring or reducing their federal income tax obligations.
Other ways that a C Corporation is better positioned for growth than other business structures include:
It may raise capital by borrowing money and selling equity.
It has no restriction on how many owners (shareholders) it may have.
Ownership may be transferred via the sale or distribution of stock certificates.
It has perpetual existence; a C Corp continues indefinitely beyond the life of its owners unless it is dissolved.
A business that has “Inc.” or “Corp.” after its company name projects professionalism and may find that vendors and customers perceive it as more legitimate and trustworthy. Also, investors will often be more willing to fund a business established as a C Corporation.
Steps for Incorporating as a C Corp
Because business entity types have upfront and ongoing financial and legal effects, entrepreneurs should discuss the pros and cons of forming a C Corp with their lawyer and accountant or tax adviser before deciding to move forward. Although some requirements vary from one state to the next, the process for incorporating as a C Corporation usually involves:
Choose a business name. It’s important to do a corporate name search to ensure a name is available in the state, and a trademark search will identify if the name is available for use in all 50 states. Note that some C Corporations are required to use the word “Corporation,” “Company,” “Incorporated,” or an abbreviation of one of them behind their name.
Select a Board of Directors. These are individuals who will jointly oversee the activities of the C Corp and represent its shareholders.
File Articles of Incorporation with the state. This document (which is also sometimes called a “Certificate of Incorporation”) serves to formally register the business as a legal entity in the state.
Obtain an Employee Identification Number (EIN) from the IRS. An EIN (also called a “Tax ID Number” or “Federal ID Number”) is a nine-digit number that the corporation will use for tax filing and reporting purposes. Most banks will require a corporation to have an EIN before they open a business bank account for the company.
Draft bylaws. Corporate bylaws serve as a business’s ground rules for operating the company. They help ensure everyone running the business knows how to handle various situations and responsibilities.
Hold the first Board of Directors meeting. This first meeting covers important topics relevant to starting the C Corporation, such as appointing officers, adopting bylaws, choosing a bank, setting the fiscal year, authorizing the issuance of stock, and more. The business must record the actions of the directors in corporate minutes, which all directors must sign off on.
Open a corporate bank account. After doing so, the C Corp may accept checks and other payments from customers, pay vendors, and conduct other financial transactions.
Obtain required business licenses and permits to operate legally. Depending on the type of business, a C Corporation may need to apply for federal, state, county, or local licenses and permits. Much of this information is available online, and Optimum Tax Law can assist businesses in determining the specific licenses and permits they will need to secure.
Submit an initial report. Some states (California, for example) require C Corporations to file an initial report, often referred to as a “Statement of Information.”
Issue stock to each shareholder. A C Corp must record its shareholders’ names and contact information. It might also choose to issue paper stock certificates to its shareholders, although that’s not required legally. Corporations must comply with all securities laws of the state.
C Corp Compliance Requirements
After a C Corporation is established, it must observe certain ongoing corporate formalities to maintain compliance and remain in good standing with the state.
Some of the common corporate compliance requirements a C corporation must fulfill include:
Regular meetings of its board of directors
At least one shareholders meeting each year
Recording meeting minutes
No commingling of personal and corporate assets
Although C corporations have more compliance requirements than sole proprietorships, partnerships, and LLCs, they can be well worth the additional time and effort to maintain because of the liability protection, potential tax advantages, and growth opportunities that they provide.
Costs of Incorporating
Even though forming a C Corp involves more legalities and formalities, the costs are reasonable compared to other business structures that do not offer the same level of personal liability protection, growth potential, tax flexibility, and other advantages. Businesses can keep the costs of incorporating and remaining compliant manageable by asking Optimum Tax Law to handle the legal paperwork.
If you have decided that forming a C Corporation is the right choice for your business, Optimum Tax Law is here to help you with all of your business registration and compliance filings. Contact us today to save time, money, and hassles as you incorporate your company and fulfill your dreams of entrepreneurship!