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What is a C Corporation (C-Corp)
If you are thinking about forming your own corporation or LLC, you will have the chance to decide how it should be taxed by the federal government. The Internal Revenue Service will initially classify any corporation as being a C Corporation. This means that the corporation itself will be paying taxes on the income it earns. However, if the shareholders prefer and the corporation qualifies, you can choose instead to file as an S corporation. In this way, the corporation will not be paying taxes. Instead, the shareholders themselves will report and pay any of the business taxes on personal returns. However, a good alternative to this is the C corporation.
Many small business owners overlook the standard corporation, embracing either the S corporation or LLC. It is true that there is a chance of double taxation that LLCs and S corporations can avoid, as well as more state requirements than you would have for an LLC. But these problems with corporations have been greatly exaggerated. In fact, setting up your business as a traditional corporation can offer a number of major advantages over LLC or S corporation structures. Some of these advantages include:
• Owner Limited Liability
• Distinct Legal Identity
• Perpetual Existence
• Management and Ownership Separation
• Easily Transferable Shares with No Restrictions on Who Can Hold Them
• Broad Acceptance among Investors and Venture Capitalists
• More Tax Planning Choices
• Stock Options Offers
Note that if the shareholders prefer, they can choose to opt out of certain of the above advantages. For instance, a business can in its articles of incorporation establish that it will only exist for a limited period of time. They can also be agreements about shareholders being responsible for corporate debt or restricting share transfers.
Corporations Are Their Own Entities
Once a corporation is formed, it is an entity to itself. It has its own liabilities, assets, responsibilities and rights. This means that the corporation can – among other things – sign contracts, offer guarantees, buy or sell property or real estate investing bonds or lend money.
Corporations and Limited Liability Protection
Thanks to the fact that corporations exist as separate entities, anyone doing business with such a corporation must turn to the corporation itself if they wish to satisfy any financial obligations that are owed to them or their business. They cannot turn to the shareholders to address these debts. This means that the shareholders potential exposure to any losses is entirely limited to the amount that they invested in the corporation.
Corporation Perpetual Existence
Another important point about operation is that it has a “perpetual existence.” This is different from a sole proprietorship. Generally speaking, the death of the owner of a sole proprietorship means the death of the business as well. With a corporation, the business can go on regardless. Once you have formed a corporation – unless stipulated otherwise in the articles of incorporation – it will continue on until it is liquidated, wound up or dissolved. In addition, shares can be transferred back and forth among shareholders without having any impact at all on the existence of your corporation.
Ready to Incorporate your business today?
Ready to Incorporate your business today?
Corporations Are Not Directly Managed by Shareholders
Shareholders usually have very limited management rights when it comes to actually running the corporation. A corporation is set up such a way that it is managed by a Board of Directors – which in turn appoints officers who actually run daily operations. With certain exceptions, this is true of corporate law in every state in the United States. While shareholders are entitled to financial benefits that accrue based on the types and number of shares they own, they do not have a right to interfere with day-to-day affairs.
What they can do is elect directors – or remove these directors if necessary – vote on major structural changes – such as dissolutions or mergers – and inspect records and books. Note however that certain states have in place corporate laws allowing shareholders to directly manage without installing a Board of Directors. However, this is far from common.
Stock ownership Comes with a number of rights. Shareholders are free to sell their shares, with the buyer then becoming the shareholder – with all the rights that accrue to owning those shares. By contrast, members of an LLC can sell their economic rights in the business, but not normally their management rights – unless the operating agreement allows for this. Otherwise, the member has to obtain consent from the other existing members to sell their interests and allow a buyer to then become a member.
Obtaining outside Investment Is Easier
All other things being equal, corporations can much more easily attract investors. Share ownership is generally viewed as preferable to membership in an LLC, which is why corporations are able to get capital via equity financing much easier than an LLC can. In addition to this, venture capitalists are much more likely to invest in a corporation. As a matter of fact, venture capitalists often cannot make investments in LLCs or S corporations because of restrictive tax laws and the rules laid out in governing documents.
Fewer Restrictions on Shareholders
Again, unless the governing documents of the corporation indicate otherwise, anyone can own stock in corporations. By contrast, tax laws are very restrictive when it comes to who is allowed to own stock in S corporations. For instance, resident aliens or non-US citizens are not permitted to own stock in S corporations. In addition to this, LLCs and corporations cannot own shares in an S corporation. And there is a 100% shareholder limit when it comes to S corporations.
Corporate Law Is Extensive and Well-Established
There is very little ambiguity when it comes to corporate law. Corporations are the oldest type of formal business entity, which means you’re going to encounter fewer surprises in this area of law. On the other hand, many states are still struggling to determine just which precedents from corporate law can apply to LLCs. For corporations themselves, there is a long track record of how the law should be applied.
This long tradition of corporate law makes it easier for management in a corporation to predict the consequences – legally speaking – of any decisions they make. It also makes it easier for investors to determine the impact of any changes they might make to the corporations overall structure, which in turn allows them to draft solid agreements to protect themselves and their investment.
Tax Planning Advantages of Corporations
While operating your business as a corporation can involve greater complexities, you also have a wider range of tax planning options throughout the lifecycle of your business. This is a particularly complex topic below, and you should discuss the full implications of choosing a traditional corporation status versus an LLC or an S corporation with a qualified and experienced tax advisor.
Some of the Disadvantages of Corporations
While there are certainly a number of advantages to choosing corporation status for your business, there is no denying that there are certain disadvantages as well. Some of these disadvantages include:
• Double Taxation
• Greater Complexity
Unless they elect to be taxed as S corporations, corporations are separate entities that pay their taxes separately. In short, corporations pay corporate taxes on their income, after they offset that income with any credits, deductions, and losses.
There’s no denying that running a corporation is more complex than operating the average LLC. Corporate law requires far more formality in the way in which a corporation is managed. For instance, it’s a requirement to have director and shareholder meetings. Proper notice of such meetings has to be given and accurate minutes maintained. LLCs are run much less formally. Record-keeping also has to be much stricter in the case of corporations.
A corporation then pays all of its shareholders dividends from this income after they pay their taxes. But the individual shareholders themselves and have to pay personal income taxes on the income they receive from the corporation via dividends. This is often referred to as “double taxation.” While this can be a very negative aspect of incorporating, there are various ways that you can at least reduce – or even entirely eliminate – double taxation with the help of your tax advisor.
Ready to Incorporate your business today?
Ready to Incorporate your business today?
To Sum up
As the above makes clear, there are definite advantages and disadvantages to running a business as a corporation. Of course, you may want to hire a good attorney and an accountant to help you determine – based on your future plans for growth – whether a C Corp is a good choice as your business structure.
C Corp FAQs
A: No, you do not need necessarily need an attorney to help you form a corporation in your state. It may well be that you can do the paperwork yourself, although it is frequently complex. It’s also fairly expensive in most cases. One of the reasons some people choose LLCs is the simplicity and low cost. If you’re uncertain, hiring an attorney might be wise.
A: Business owners should consider forming a corporation if they are concerned about shielding their personal assets from any debts, liabilities or judgments against the business. While an LLC also provides a shield, if you need to attract venture capitalists and will have multiple owners, a corporate structure may well be preferable.
A: Any individual or entity – such as another corporation or an LLC – can own shares in a corporation.
A: If you're forming a corporation, there is no single best State in which to form that corporation. You should select the state based on the reason you had forming your business in the first place and your future plans for expansion. In most cases, small businesses will incorporate where the company operates and where the owners actually live. This reduces ongoing costs, compliance issues and other potential problems. If you're going to form a corporation outside of your stay, you will have to get a certificate of authority that allows you to operate your business in the other state. More than this, you will have to pay fees and file annual reports in both states.
A: You will definitely need at least one registered agent appointed for your C Corporation. Your first registered agent must be appointed in the state where you file your articles of incorporation. You will also need registered agents in every other state where you do business.
A: After the state provides you with a certificate of incorporation, a number of meetings will have to be held at your new company. You will have to have the initial directors meeting, issue stock and take other actions were that your new corporation is functionally correctly. And until the corporation dissolves at some point, you will have to meet certain reporting requirements and have an annual meeting.
A: A number of states permit corporations owned by just a few people – usually no more than 35 – to ignore some of the corporate formality and requirements. For instance, they do not necessarily have to appoint a board of directors. Instead, corporations of this type are directly managed by shareholders. There are no notice requirements and fewer meetings. Some states do not permit this, while some of those that do – such as the bot and Delaware – required that this choice to be a close Corporation be embedded in the articles of incorporation.
A: Most states will permit businesses to switch their status from one type of business to a different type. This switch can be even more complex than setting up a corporation to begin with, so it might be a good idea to get a reliable attorney and an accountant to help with this process. This is particularly true if you operate in more than one state, since you will have to make changes to your paperwork in all of them.
A: In order to change the legal name of a corporation, you will have to file a form called a Certificate of Name Amendment in the state where your corporation was formed. In addition to this, you will need to file similar certificates in all of the states in which your business currently operates.