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-Corp does offer a lot of benefits, there are also some drawbacks that you should know. Here’s everything you need to know about forming a C-Corp, including how to form one and their pros and cons.
What Are the Benefits of a C-Corp?
As an 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
- Tax benefits
- Tax deductions
Limited liability is the first benefit of a C-Corp. The limited liability that a C Corporation offers means that owners aren’t personally liable if the corporation experiences debt or losses. Only what an owner invests into 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
- Employee benefit plans such as insurance and pensions
- Repairs and maintenance
What Is a C-Corp?
A C-Corp is a business structure that taxes the corporation separate 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 tax liability 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.
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 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:
- Double taxation
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.
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.
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. 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 that 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 for 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 of 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 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 the stockholders 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 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:
- Sales Tax (if applicable)
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 operation 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 with labor industries, such as barbers, business contractors, and mechanics. These fields have specific licenses due to their work duties.
6. Develop Ongoing Reports
C-Corps have 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
Work with the Professionals
Forming a C-Corp 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 small business accounting and tax advice.