What is a C Corp
Are you thinking about starting a small business? But concerned you don't know where to start when it comes to choosing the best business entity? As you start planning your new business, choosing the right structure is imperative.
But where do you start? You want to be a business owner, not a lawyer or tax accountant. From liability protection to paying taxes, your head is swimming when it comes time to decide the best business entity.
In this article, we will break down one of your choices when it comes to choosing the best structure for your new business. The C Corporation might be the most daunting choice, but when done correctly it also might be the best choice for your new start-up venture.
What is a C Corporation (C-Corp)?
A C-Corp is one of the most conventional types of legal structures used to set up a business. In this structure, the company is an entity separate from its owners or shareholders and taxed separately from its owners.
However, C Corporations must pay a corporate income tax on the profits of the business. Then the owners also pay personal income taxes on any dividends paid to them from the profit of the business. This makes a C-Corp subject to what is called double taxation. Double taxation is one of the biggest disadvantages of starting a C-Corp.
Other business structures, S Corporations, or Limited Liability Companies for instance, also keep the owners' assets separate from those of the business entity, however, their legal and tax structures differ. With these types of businesses, the profits aren't taxed at the business level. Rather they go through a pass-through process whereby the profits are taxed on the personal tax returns of the business owners.
How C Corporations Function
C-Corps must pay taxes on its earnings before the distribution of dividends, or remaining profits, to its shareholders. The company's shareholders also pay personal income tax on those dividends, creating double taxation on the profits. However unfavorable it seems to pay taxes twice on the same profits, there is the advantage of a lower corporate tax rate and effectively reinvesting into the company.
When a company first incorporates, it must establish its bylaws and keep them on location at the corporation's main headquarters. The annual shareholder meeting is one requirement of legally maintaining a C-Corp business structure. To ensure constant transparency in the business, the corporation must record and maintain meeting minutes as part of the requirements of its business structure.
Additionally, the business entity must maintain voting records including the directors and owners' names and their respective shares in the company. C-Corporations must also file their financial statements, fiscal disclosure reports, and other annual reports.
A C-corp is one method of organizing a business whereby the owners' assets and personal income remain separate from the assets and income of the corporation.
C corporations afford the owners and investors of the company limited liability protection in the event the business fails. The debt that any owners or investors incur is limited to the amount they invested.
C corporation's structure includes a Board of Directors voted on by its shareholders. All C corporations must hold an annual shareholder meeting with both the board of directors as well as the company directors.
How to Establish a C Corporation
After finalizing the name of a currently unregistered company name, the owners must register the business name and file the Articles of Incorporation with the Secretary of State according to that state's laws. Laws may differ between states.
Most C corporations issue stock certificates and offer stock to potential shareholders once the business is established. Once purchased by investors, those shares equate to a percentage of ownership in the corporation.
An additional requirement of all C corporations is filing the Form SS-4, which establishes the company's employer identification number (EIN). Corporate laws may differ between jurisdictions; however, most C corporations must file state income, payroll, disability and unemployment taxes.
Furthermore, an established Board of Directors must oversee the general operations and management of the entire business. Appointing a board of directors ensures a resolution to the principal-agent situation; thereby avoiding conflicts of interest due to ethical dangers should a single agent represent a principal.
C Corporations are Beneficial Business Structures
C-corps establish limits to the individual and personal liabilities of its employees, directors, officers, and shareholders. As such, there remains the inability of the entity's legal obligations becoming personalized debts of any member affiliated with the company. Until and unless the company is permanently closed, it exists even as owners and management change.
A C-Corp may limit the number of shareholders and owners. Should the company reach those thresholds, it must register the data with the Securities and Exchange Commission (SEC). Corporations often require extensive capital investments when it needs to fund additional projects or expand. Offering stock shares is one of the primary ways a corporation raises those necessary funds.
Wrap it Up
In conclusion, a C corporation is a type of business structure in which the company is incorporated and pays corporate taxes before paying dividends to its shareholders. When registering a C-corp you will need to submit your Articles of Incorporation as well as establish the personnel hierarchy for your new business. There will also be a board of directors who will make the general management decisions while the company directors will run the day to day operations.
There can be some great advantages to choosing to incorporate, while there are also can be some disadvantages to choosing this type of business structure. You will need to weigh all the facts presented in this article and decide if proceeding with the corporate formalities is the best decision for you and your new business.