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Here’s what you need to know about forming a C-Corporation

What Is a C-Corporation?

When you have begun to see significant success in your business (and the potential for more), it’s time to consider forming a C-Corporation, or C-Corp. Ready to look for venture capital or considering going public? The ownership structure of a C-Corp will make your business much more attractive to outside investors. Nearly all larger corporations in the US are C-Corps, but a C-Corp can also consist of one person. Use the information below to determine whether or not forming this type of entity is right for your company.

A C-Corp, also known as a corporation, is a type of entity that is formed and regulated on a state level. The corporation is formed by filing Articles of Incorporation with the Secretary of State within the state of incorporation. The policies and cost vary from state to state.

The corporation is the oldest form of business entity, and has been historically a successful innovation that has allowed a group of individuals to collectively pool their resources and capital to pursue a common purpose, with their risk limited solely to the amount of stock owned. With that said, a standard corporation may not be the best entity choice for everyone in today’s business world.

How Is A C-Corp Different From An S-Corp Or An LLC?

The S-Corporation, or S-Corp, and the Limited Liability Company, or LLC, present many of the same benefits of asset protection provided by the corporation, while allowing for less formality and more flexibility in regards to requirements and the distribution of ownership.

There is also a difference in how the profits from a C-Corp are taxed. Unlike the Limited Liability Company and the S-Corporation where the income of the company flows through to the individual tax returns of the shareholders or members, the corporation is required to file a tax return much in the same way as an individual does.

What Are The Requirements Of A Corporation?

Corporations are required to hold annual meetings for both the shareholders and the board of directors. The annual meetings are held to discuss and decide on important decisions that are faced by the corporation.

Ownership in a corporation is expressed through the issuance of shares, while the management of the corporation is governed by a board of directors who are elected by the shareholders..

The board of directors select officers who manage the day to day activities of the corporation. The board of directors also will draft bylaws for the corporation. Bylaws are basically written protocols that define the way that the corporation will be governed. This ownership structure is what makes C-Corps attractive to investors.

In small businesses, the owners often hold more than one or all of the following positions, which are required of all corporations:

  • Shareholders: They own the company's stock and are responsible for electing the directors, amending the bylaws and articles of incorporation, and approving major actions taken by the corporation like mergers and the sale of corporate assets. They alone are allowed to dissolve the corporation.
  • Directors: They manage the corporation and are responsible for issuing stock, electing officers, and making the corporation's major decisions.
  • Officers: The corporation must have a president, secretary, and treasurer. These officers are responsible for making the day-to-day decisions that govern the corporation's operation.
  • Employees: They receive a salary in return for their work for the corporation.

How Are Profits And Taxes Handled With A C-Corp?

A C-Corporation is an incorporated entity that is taxed as a separate business entity. Unlike individuals, C-Corporations have to file a designated tax form with the IRS, which is called IRS Form 1120. Additionally, C-Corporations have their own tax rates.

Corporations have the option of retaining their profits and earnings as part of their operating capital; this can shelter some of the profits from taxation. They may also choose to distribute some or all of the profits of the company as dividends, which are distributed to shareholders.The percentage of dividends of that each shareholder is entitled to is directly correlated to the amount of shares that they own.

Dividends that are distributed to shareholders are in essence taxed twice. They are taxed first at the corporate level (on the corporation’s Form 1120), and again at the individual level (on the shareholder's Form 1040).

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