Choose Your Business Formation: What's a C Corp?

What is a C Corp? Here's everything you need to know.

May 23rd, 2019   |    By:     |    Tags: Strategy

What is a C Corp?

“C corporation” or “C corp” stands for “corporation.” The “C” comes from the fact that C corp income is taxed under the subchapter C of the Internal Revenue Code. That’s the law that responsible for the double taxation that C corps are known for, which we’ll go into more below. C corps are the most common type of corporation in the United States, but they may or may not be the best options for your startup!

Corporations are a business entities that exist entirely separately from their owners. They can be taxed, make a profit, and be held liable. In fact, they offer the highest level of protection from personal liability for the owners.

When it comes to stock, C corps can issue stock and shareholders can sell their stock and/or leave the business without affecting the life of the corporation, unlike some other types of incorporations. A C corp is a good option for a company that’s planning on eventually going public.

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How do C corps work?

Structure of a Corporation

Let’s look a the structure of a C corporation. C corps have three main tiers of management: shareholders, directors, and officers.

Shareholders The shareholders of a Corporation are the owners. They’re the ones who “hold” shares of stock. Depending on how much stock they own, they have varying degrees of influence on the corporation — but they don’t make the decisions or run the day-to-day. Instead, they elect the company’s directors, who take care of all of that. They also vote to remove directors, when it seems like those directors aren’t working in the best interest of the corporation.

Directors The Board of Directors is elected yearly by the shareholders and they have a more direct involvement with the running of the corporation. They’re obligated to have an annual meeting about the business, as well as elect the corporate officers, set operation policies, expand the business, and authorize financial decisions. If a director doesn’t act in the corporation’s best interests, they can be held personally liable.

Regular meetings

C corps are required to have at least one annual meeting, during which

Officers Officers are elected by the Board of Directors and they manage the day-to-day operation of the corporation. There are usually four officers: President, Vice President, Treasurer, and Secretary. They’re in charge of keeping things moving along, managing employees, and taking care of the nitty-gritty.

Advantages and disadvantages of C corps

Why should you incorporate your company? Here are some advantages and disadvantages of establishing a C corp.

Advantages of a C corp

1. Limited liability When a business is incorporated, the owner is protected by limited liability protection. That means if something happens — like you get sued or the company goes under — your personal assets are safe.

2. Gives you credibility Investors often like it when your company is incorporated because, well, it just looks more legitimate! It can also help with acquiring new customers and partners.

3. Monetary benefits It’s easier to raise money, sell stocks, and transfer ownership when your startup is incorporated.

4. Easier to set up retirement funds. Retirement funds aren’t something the self employed always think about, but with an incorporated business, it’s much easier to set up that 401(k).

5. Keeps your company alive. When a company is a C corp, the corporation lives on even if the founder dies. We know that sounds kind of macabre, but it’s something to consider!

6. More stock options When it comes to stock, C corps can issue stock and shareholders can sell their stock and/or leave the business without affecting the life of the corporation, unlike some other types of incorporations.

7. Less likely to be audited C corps are less likely to be audited than businesses structured in other ways, because of their more complicated tax structure.

8. Benefits aren’t taxed In some types of business structures, benefits are taxed. But a C corp can offer benefits — like a health plan — tax-free.

9. It’s easier to offer equity to employees If you’re looking to offer equity as a perk to your startup’s employees, then it’s easier to do that with a C corp than with some other types of business formation, including LLCs.

Disadvantages of a C corp

1. Double taxes If you choose to incorporate as a C Corp, your company will be subject to double taxes. You can avoid that whole deal by registering as an S Corp.

2. Continuing fees One big bummer of being incorporated is that you have to keep paying to stay incorporated. In addition to the initial registration fee, you’ll have to pay a “filing fee” every year to stay registered.

3. Increased amount of record keeping If your company is a C corp, there are initial and annual rules about record keeping. In comparison, sole proprietorships, general partnerships, and limited liability companies (LLCs), don’t have to do the same.

How to set up a C corp (a.k.a. how to incorporate!)

There are a few steps that a company needs to take in order to set up a C corp.

Choose the state you want to incorporate in.

Interestingly enough, you don’t have to incorporate in the state in which you live. Many companies choose to incorporate in Delaware, for example, because the court system there is more expedient than in other states. Venture capitalists also prefer Delaware incorporation, as they’re generally more familiar with that court system. Do a little research into filing fees, registration fees, and other factors when you’re deciding the state in which to incorporate.

Choose a business name.

Pick a name and make sure it’s not already taken by a business in your state.

Choose a board of directors.

Choosing a board of directors is an important part of getting a company going. Your board will represent the interests of your shareholders and will also help make major decisions for the company.

Determine the type of shares you’ll be issuing.

What kind of shares will you be issuing your shareholders? The options include ordinary, preferred, or shares with or without voting rights.

Designate a registered agent.

Who’s going to be in charge of all the legal documents once you’re incorporated? That’s your registered agent and the government is going to want to know that name.

File articles of incorporation.

Once you have everything all together, it’s time to file your articles of incorporation! The cost and process differs from state to state, so make sure you’re following the instructions for the correct place when you file.

In addition to the articles of corporation, all C corps also have to file Form SS-4 to obtain an employer identification number (EIN). Your EIN is a unique nine-digit number assigned by the IRS to American companies for the purposes of identification. Basically, it’s your tax number.

Establish bylaws.

You’ll also need to have a set of bylaws, which are the rules by which your company will run.

Issue stock.

Once you get that official registration notification from the government, go ahead and issue stock!

C corps vs. S corps

An S corp is another type of business corporation. Like a C corp, an S Corp passes all of its finances — corporate income, losses, deductions, and credits — through shareholders. But unlike C corps, S corp shareholders report the income and losses of the company on their own personal tax returns, which means the company isn’t subject to double taxation.

Converting S corp to C corp

The major tax overhaul of 2018 has many corporations considering converting from S corp status to C corp status, in order to take advantage of the new, lower tax rate. If this is something you want to do, you have to first get permission from the IRS to convert. Then? Hire an accountant. The process is more complicated than the average startup founder without years of experience in tax law should tackle on their own. This is one place where it’s worth it to pay someone else, rather than trying to bootstrap it.

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