What exactly is a C Corporation?

A C corporation (C corp) is one of many company structures to consider. While selecting a structure for your company does not have to be difficult, it is important to understand what a C corp is and if it is ideal for you. Continue reading to discover more about the fundamental structure of a C corporation, its advantages and disadvantages, and how it compares to other forms.

A C Corporation’s Basic Structure

An incorporated company’s default structure is a C corporation. It is a legal entity distinct from its owners, having a basic operating structure made up of shareholders, officers, directors, and workers. C corps shareholders elect the board of directors. In tiny businesses, one individual may act as the only shareholder, officer, director, and employee.

The Advantages of Creating a C Corporation

There are several advantages to forming a C company, including:

Protection from Liability. Owners, shareholders, executives, directors, and employees of C companies are shielded from personal responsibility.

Ownership Independence Because the administration of a C corporation is distinct from its owners, the firm may continue to function regardless of ownership or management changes.

Shareholders are not limited. C companies may have an infinite number of stockholders from any location on the planet. They may also issue different types of shares.

Credibility has grown. Incorporating your firm provides it legitimacy when doing business with others or seeking finance.

Various Expenses and Tax Deductions The Internal Revenue Service recognises the most business costs and tax deductions for C businesses (IRS).

Taxation that favours investors. Unlike other business arrangements, C corporation shareholders only have to pay taxes when the firm pays them dividends. This is one of the main reasons investors favour C corporations: they just have to worry about paying taxes on the money they actually received.

The Drawbacks of Creating a C Corporation

This corporate form also presents a few significant challenges:

Structure is required, as are more regulations. C companies must adhere to a rigid operating structure while assuring compliance with various federal, state, and local rules.

Fees and paperwork have increased. C companies suffer more taxes and paperwork as a result of the rigorous structure and rules placed on them. Depending on the precise configuration of a C company, its establishment might cost thousands of dollars, in addition to continuing expenses for sustaining the organisation. C companies also spend more money keeping track of taxes, business and financial records, and ensuring regulatory compliance.

Taxation twice. Double taxation is the most often mentioned drawback of creating a C corporation. It happens when a firm earns a profit at the end of the year and distributes it as dividends to its shareholders. While the earnings were previously taxed by the C company, shareholders must now report the dividends as income on their personal tax returns and pay tax at their individual rates.

Corporation vs. LLC

When determining how to build your company, consider which structure is ideal for you. Corporations and limited liability companies (LLCs) both have advantages and downsides.

One advantage they both provide is limited liability; under both arrangements, the firm becomes a legal entity independent from its owners.

Management and taxes are two key differences between LLCs and corporations. LLCs offer more management freedom, while corporations must follow a prescribed management order, with a board of directors managing management tasks.

As previously stated, companies benefit from a broader variety of tax deductions while simultaneously being subject to double taxation on shareholder dividends. LLCs, on the other hand, benefit from pass-through taxes. This implies that any revenue or loss is not taxed at the corporate level, but instead “passes through” to the individual owners and is taxed at their personal tax rate.

One reason you may decide to form a corporation rather than an LLC is because corporate shares can be easily transferred from one owner to another. This is a smart option for a company that expects to attract outside investors or make its shares accessible to the public. An LLC, on the other hand, may have people, companies, and/or trusts as owners.

Corporations have several precedents and case laws resulting from their presence in the United States throughout history. LLCs, on the other hand, are a newer corporate form that is regarded differently in each state. While many business owners do not consider this a big consideration when determining how to form their organisation, it may be crucial to others.

What Is the Difference Between a C Corporation and a S Corporation?

The primary distinction between a C company and a S corporation is in how they are taxed. S companies, like LLCs, benefit from pass-through taxes. As a consequence, S corporations are often best suited to smaller businesses. Other significant distinctions include:

Requirement for a Domestic Corporation An S corporation must be based in the United States.

Domestic ownership is required. S companies, unlike C corporations, cannot have foreign owners. Its owners must be citizens or legal residents of the United States, which implies that S company owners cannot be other companies.

S companies are allowed to have up to 100 shareholders.

Stock Classes are limited. S firms may only sell one kind of stock.

Overall, C businesses have greater ownership and stock options while suffering larger tax consequences.

What Are the First Steps in Creating a C Corporation?

To establish a C company, you must first accomplish the following steps:

Select a Name. Choose a memorable name for your firm and include the words “Inc.,” “Incorporated,” or “Corporation” in the name.

Choose Your Board of Directors Following the selection of a business name, you must form a board of directors to represent the shareholders, monitor business operations, and make decisions for the company.

Fill up and submit your Articles of Incorporation. To create your firm a legal entity, file this collection of official paperwork with the state in which you desire to incorporate.

You must pay the filing fee. You must pay any mandatory state filing fees when you submit your Articles of Incorporation.

Create Your Company’s Bylaws. Following that, you should create your corporation bylaws. Your bylaws will state:
General facts about the company
Number of directors on the board
Procedures for voting
The number and kind of shares
Procedures for annual meetings
How and how often board meetings will be held
Information about corporate board officers and their responsibilities
The corporation’s fiscal year
Audits of financial statements

Set the date for the first Board of Directors meeting. Hold a meeting with your board of directors to adopt the bylaws and other matters, such as the following:
Making the decision to create a bank account
Choosing officers and determining their pay
Issuing corporate stock shares
Anything else that has to be discussed at the initial meeting.

Make stock certificates available. Stock certificates split your company’s ownership into percentages. Most corporations no longer provide paper stock certificates, although digital certificates are still available. Although some states do not compel you to issue stock certificates, they are still a smart idea. It provides stockholders peace of mind by giving confirmation of ownership. Stock certificates also explicitly describe the owner’s voting rights, transfer rights, and other rights and exclusions. As a result, certificates can guarantee that these rights and exclusions are enforced.

Apply for the Required Licenses. Next, apply for any business permits needed by the state where you want to establish your firm. Make sure to identify and apply for any extra licences necessary by the industry you’ll be operating in as well as your local government.

Request an EIN. Whether you have workers or not, you must get an Employer Identification Number (EIN). This is your tax identification number as a corporation. This is also required to create a business bank account or apply for a loan.

When determining whether or not to incorporate your firm, there are pros and drawbacks to consider, just as there are with any other business organisation. Consider your long-term objectives, company kind, tax structure, and record-keeping needs. This will assist you in determining the appropriate structure for your company.