What is a C Corporation?
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A C Corporation can have an unlimited number of investors. CREDIT: Gualtiero Boffi | Shutterstock |
One of the more common business structures company owners employ is a C Corporation.
C corporations refer to businesses that are set up so they are taxed as separate entities. They are called C corporations because they are bound by the rules and regulations of Subchapter C of the Internal Revenue Code. Almost all C corporations are publicly traded companies.
The difference between a C corporation and other structures, such as an S corporation or a limited liability company (LLC), is in the way they are taxed. Unlike other structures that don't tax the business directly, C corporations are required to pay both federal and state taxes. While other structures only mandate shareholders pay taxes on any profits they receive, C corporations face the possibility of being double-taxed since both the business and the owners must pay taxes on the profits. Like other structures, however, owners of a C corporation do receive limited liability protection, which guards their personal assets should the company incur and debts or legal issues.
C corporations are owned by shareholders, each of whom owns stock in the company. Unlike other structures that limit the number of shareholders, C corporations can have an unlimited number of investors. One of their main responsibilities is to elect the company's board of directors. The board is responsible for, among other things, setting the strategic direction of the company and hiring its day-to-day leaders and company officers, which must include at least a president and secretary. In addition to electing the board of directors, shareholders are also required to approve the company bylaws and approve any merger proposals. C Corporations must hold regular stockholder and board of directors meetings, during which proper minutes must be recorded. All C corporations also must assign someone to serve as a resident agent. The resident agent is the person responsible for a summons or petition in any lawsuits that may be brought against the business.
Benefits and disadvantages
One of the top benefits of C corporations is the liability protection they provide for owners. The structure's limited liability ensures owners are not held personally responsible for business debts or lawsuits brought against the company. C corporation status also offers some tax advantages, including the opportunity to deduct tax expenses. Since C corporations can have an unlimited number of shareholders, they have an advantage over other structures in raising money when needed. A C corporation simply must sell more stock in the company if more capital is needed. C corporations can live on perpetually, even if owners of the company were to die. The major disadvantage is the double taxation owners face. Under this structure, both the business and each individual owner pay taxes on any profits garnered during the year. Companies can avoid the double taxation by reinvesting any profits back into the business. Additionally, C corporations are subject to taxes in all states in which they do business; they often require the hiring of a lawyer to ensure all federal and state regulations are being followed; and extensive records must be kept and fees must be paid each year to keep the status.
How to start a C corporation
Choose a name: The first step in setting up a C corporation is choosing a name for the business. Most states require that it be a name that isn't already being used and isn't similar to one being used.
File articles of incorporation: Once an original name has been selected, the business owner must fill out and file the Articles of Incorporation form, also known as a Certificate of Incorporation, with the secretary of state's office. The form spells out the basics of the business, including the name, address, purpose and incorporators.
Hold board meeting: Once approved for incorporation, the business must hold a board of directors meeting in which minutes are recorded, and draft corporate bylaws.
Obtain licenses: Before finally opening up, it is critical to obtain all the necessary state and local licenses to needed to operate.
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