A C Corporation is one of several ways to legally recognize a business for tax, regulatory and official reasons. A C Corp is simply a way to structure ownership of a business, and contrasts with other popular business structures including Limited Liability Companies (LLCs), S Corporations, Sole Proprietorships and others.
Generally, a C Corporation structure is better for larger businesses. This is particularly true if they intend to publicly trade shares, through having an Initial Public Offering, or IPO. A C Corporation is much more attractive to potential investors, including venture capitalists and shareholders because it allows wider ownership of the corporation.
The majority of larger businesses in the United States are structured as C Corporations, although a C Corp could, theoretically, consist of just one person. The information below will help you decide if a C Corporation structure is right for your business.
A C Corp, also known as a corporation, is a type of business entity that is formed and regulated on a state level. The corporation is formed by filing “Articles of Incorporation” with the Secretary of State in the state of incorporation. The policies, articles, cost and regulations for forming a C Corp vary from state-to-state. Details on exactly how to form a C Corporation can be found at the end of this article.
The corporation is the oldest form of business entity. It has long been a successful way to do business and allows groups of individuals to pool their resources and capital to pursue a common purpose, with their risk limited solely to the amount of stock they own. Although a C Corp is a popular business structure, there are other options for forming businesses in the US.
Forming a C Corporation does have several benefits:
Because a C Corp is a separate legal entity, the liabilities of the business are separate from the liabilities of the directors, investors and shareholders. Generally, the owners of a C Corporation are protected from being liable for the business’s obligations. This does not apply in all cases, for example if corporate funds are misused, there is wilful fraud, or if certain rules and regulations are not followed.
A C Corporation can have “Perpetual Existence” — this is in contrast to sole proprietorships or partnerships where a business only exists for as long as the proprietors or owners are alive and in the business.
Ownership in a C Corporation is decided by who holds the stocks it issues. These stocks can be bought and sold between investors, and if the company’s shares are publicly traded on a stock exchange, institutions and members of the public can own stock in the company.
If a C Corporation want to raise money, it can hold an “Initial Public Offering (IPO)” where it “goes public” and offers shares for sale on a stock exchange. This can bring significant money into a business. They can also choose to issue shares periodically to raise further funding, although this can dilute the value of existing shares.
Most of the businesses that are household names are C Corporations. Incorporating as a C Corp demonstrates to others that you expect to see significant growth and can enhance the business’s credibility and authority.
A C Corporation does have some disadvantages. Briefly, they are:
We cover these in more detail below.
Two other popular business entity structures in the US are the S Corp and the LLC. They provide many of the same protections offered by a C Corp but have less formal rules on taxation, governance and compliance. This can mean more flexibility in how an LLC or S Corp is owned and funded.
One of the main differences between C Corps and S Corps / LLCs are how income from the different types of businesses are taxed.
A C Corporation 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 can retain some of their profits and earnings as part of their operating capital, this can shelter some of the profits from taxation.
The tax rates levied on C Corporations are as follows.
A C Corporation may choose to distribute some of the profits of the company as dividends, which are distributed to shareholders. The percentage of dividends that each shareholder is entitled to depends on how many shares they own.
Dividends that are distributed to shareholders are taxed twice (double-taxed). They are taxed first at the corporate level as profit (on the corporation’s form 1120), and again at the individual level as stock dividends (on the shareholder's form 1040).
A C Corporation must meet certain requirements:
The annual meetings are used to discuss and decide important information, strategic decisions, opportunities, risks and issues that the corporation will need to deal with.
Ownership in a corporation is expressed through the issuance of shares. 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 drafts bylaws for the corporation. These are written protocols that state the way that the corporation will be governed.
A C Corporation will need to have all of the following positions. In a small C Corp, one person could hold multiple of these positions.
If a C Corporation is right for you, here’s how to form one:
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