How to Start a C Corporation: A Complete Guide

C corps are a common type of business entity and for a good reason. Their structure offers flexibility and opportunities for growth.

While a C corporation status does offer a lot of benefits, there are also some drawbacks that you should know. Here’s everything you need to know about how to open a C corp and its pros and cons.

What Is a C Corp?

A C corp is a business structure that taxes the corporation separately from its members. Members of C corps are shareholders. C corps are: 

• Legally independent of its owners 
• More complex structures than other business entities 
• Not a personal liability tax for its owners 

There aren't many limits to who can join a C corp. There are no limits to the number of shareholders that can join a C corp. 

Citizens and those from other countries can invest and own a C corp. These factors allow your corporation to have shareholders from different backgrounds that can invest in the corporation.

Most corporations are taxed as C corps, but they can choose S corporations for tax purposes under the Internal Revenue Code. A business type like an LLC or Limited Liability Company is taxed either as a sole proprietorship or general partnership. Still, they can decide to be taxed as C corps or S corps.

How to Form a C Corp

1. Choose a Unique Business Name

The first step in forming a C corp is to choose your business name. It is important to choose the right business name because there'll be obstacles in later steps if you don't. 

It would be best if you chose a business name that is available and unique. You may want to contact your Secretary of State for additional information.

Finding a unique brand name and (normal-looking) domain to go with it can be a bit of a time-sink for new business owners. This free tool from Business Name Zone generates name and domain combos for you based on your input – and it only takes a few minutes.

In any state, you can use your own name as your name for your corporation. However, you must add one of the following variants of the word "corporation" such as corp. or corporation.

2. Select a Board of Directors

The directors are one of the most central parts of a C corp. The Board of Directors chosen will be in charge of the daily operations of the corporation. 

Before selecting your board of directors, you should create bylaws. Bylaws are the guidelines and rules that your Board of Directors will follow.

The process of creating your board of directors is relatively easy. Members of your corporation, called shareholders, will elect the directors in a public corporation along with other shareholders. If your company is new or is a startup company, the CEO or President of the company can elect a board of directors. 

There are at least three recommendations to ensure you choose the best directors for your C corp. First, try to avoid selecting directors based on:

• Conflicts of interest (avoid selecting members with any conflict of interest) 
• Lack of vetting (conduct a background check on potential board of director members and contact references)
• Previous relationships (a friend, a relative, or co-worker without proper vetting) 

Second, you'll want to look for these qualities in anyone that may become a board of director member: 

• Committed to the growth of the corporation. 
• Experience in an area that will advance your corporation. 
• Leadership and management experience.
• No conflicts of interest. (You can resolve this by adding a conflict of interest statement in the corporate bylaws).
• Sufficient time to attend board meetings.
• The ability to raise money for the corporation to facilitate growing the corporation.

Third, you should select an odd number of board members to avoid potential ties when voting occurs, although there isn't a requirement for an exact number.

3. File the Articles of Incorporation

Completing the Articles of Incorporation is the next step in forming your C corp. You can file this with your state's Secretary of State, though this can differ depending on the state. 

While the exact requirements for the Articles of Incorporation will vary by state, you'll need the following: 

• The name of your corporation
• The name and address of the registered agent 
• Type of corporation (it can be a non-profit corporation, a non-stock corporation, or a stock corporation) 
• Purposes for the corporation (the exact requirements will vary by state) 
• The name and address of the initial directors (board of directors) 
• The name and address of the incorporator, the person who is in charge of setting up a corporation
• The duration of the corporation (either for a fixed period or perpetual)

You may also have to explain your corporation's purpose, though this requirement can vary by state. If this is a requirement for you, try to keep the definition as broad as possible. That way, you can retain flexibility in what your corporation can do. 

The Articles of Incorporation describe the amount of liability that directors have. It can also provide information about what stockholders can do without meetings and if they can hold meetings. 

4. Issue Stock

There are two types of stock that C corps can issue: 

• Common stock
• Preferred stock

Common stock is the stock that most shareholders may have. Common stockholders can vote on the future of the corporation, but they receive dividends after preferred stockholders.

Preferred stockholders can't vote on the future of the corporation. However, they are the first to receive dividend payments. 

5. File for the Necessary Licenses

Licenses are an important part of forming your C corp. Without proper licensing in your city, county, or state, you won't be able to open or operate your C corp. 

Before you start your C corp, you should know about license requirements. There are four licenses that you will need, depending on your corporation's industry:

• Federal
• Local
• Sales Tax (if applicable)
• State

Federal licenses won't apply to many corporations. However, a few industries require federal licenses so that you're able to work with certain products. This includes drug manufacturing, investment advice, and selling alcohol, firearms, or tobacco. 

Local licenses will be a requirement in the city or county where your C corp will operate. The exact requirements will vary by state. Any fees for obtaining this license will also vary by city or county location. 

Some industries most likely to have local regulations include construction, dry cleaning, plumbing, restaurants, and retail. 

A sales tax license for business operations is a requirement in many states. When you obtain this license, you'll be able to collect sales tax while you operate your C corp. 

State licensing for business operations will go to businesses that sell products or provide a service recognized by the state. This is more common in labor industries, such as barbers, business contractors, and mechanics. These fields have specific licenses due to their work duties. 

6. Develop Ongoing Reports  

C corporation status has ongoing report requirements that you'll resume as the corporation develops. Make sure to keep track of your: 

• Annual reports 
• Financial disclosure reports
• Financial statements

What Are the Benefits of a C Corp?

As a business owner of a C corp, one of the first things you'll want to know is how it can benefit you. Owning a C corp offers benefits that can protect you and your members: 

• Limited liability protection
• Longevity 
• Tax benefits
• Tax deductions

Limited liability is the first benefit of a C corp. The limited liability protection that a C corporation offers means that owners aren't personally liable if the corporation experiences debt or losses. It also means that the owner's personal assets are protected from creditors. Only what a business owner invests in their corporation is at risk if the corporation incurs legal trouble. 

The second benefit of a C corp is how long the corporation lasts. Unlike other business entities, it is easier for shareholders to raise money for their C corp. It is also easier for C corps to be sold because the corporation's worth doesn't include the owner's value.

C corps can receive tax benefits. This will help members, called shareholders, to pay their taxes at a lower rate potentially.

The final benefit of C corps is their tax deductions. Owners and shareholders can qualify for several tax deductions. Corporations can receive tax deductions for the following:

• Bad debts 
• Charity donations
• Compensation of officers  
• Depreciation
• Employee benefit plans such as insurance and pensions
• Rents 
• Repairs and maintenance

Can You Pay Yourself a Salary in a C Corp?

Officers of corporations can receive payment as reasonable compensation. Officers in this capacity are employees, but they must not receive an excessive amount of business income. More information about a salary in a C corp is available here.

What Are the Downsides to a C Corp?

While forming a C corp has its benefits, you'll also need to know about the downsides of forming one. There are three downsides to forming a C corp: 

• Costs 
• Double taxation 
• Paperwork

There are more factors to consider when setting up a C corp. You'll need to allocate money for the Articles of Incorporation and licenses.

Double taxation occurs when the corporation pays taxes on its earnings as the first form of tax payment. This tax is a federal tax. 

The second form of tax payment occurs when individual shareholders are subject to taxes at an individual rate on their personal tax returns.

The final downside to C corps involves the required paperwork. Directors and shareholders in a C corp must hold at least one meeting annually. 

Is a C-Corp Right For You?

Now that you have a better understanding of what a C-Corporation is, it’s important to consider if it’s the best type of legal entity for your business. 

C-Corp vs. S-Corp

One key difference between C-Corporations and S-Corporations is their corporate tax structure. C-Corporations are taxed as separate entities, meaning that profits and losses are reported on the corporation’s tax return. S-Corps are considered “pass-through” entities, meaning that profits and losses are passed through to S Corporation shareholders and reported on their individual tax returns. This can lead to tax savings for small business owners, especially those in the early stages of growth.

C-Corp vs. LLC

LLCs, or limited liability companies, offer many of the same benefits as C Corporations, including limited liability protection and flexibility in management and ownership structure. However, they are taxed differently than both C and S Corporations, and may not offer the same level of credibility or fundraising potential as a C-Corp.

Work with the Professionals

Forming a C corp or another entity type, like a sole proprietorship, general partnership, or limited liability company, can be a great way to propel your new business. Rather than go it alone, work with the professionals at 1-800Accountant to receive top-notch expertise in entity formation, small business accounting, and tax advisory.