All you need to know about a C-Corp

One of the perks of conducting business in the modern economy is the availability of several business vehicles from which a business owner may choose to carry on his business. One of such business vehicles is the C-Corporation (C-Corp). This piece shall examine the nature of a C-Corp, its key features, its benefits and how to incorporate a C-Corp. 

What is a C-Corp?

A C-Corp is a legal business structure recognised in the United States. It is a type of corporation that is formed under state law and is considered a separate legal entity from its owners, known as shareholders or stockholders. The name “C-Corporation” comes from the subchapter C of the Internal Revenue Code, which governs the taxation of this type of entity. C-Corporations are subject to corporate income tax at the federal level, as well as potentially at the state level, on their profits. 

You can learn about the differences between an LLC and a C-Corp here

Key features and characteristics:

Some of the key features of the C-Corp are as set out below:

1. Limited liability: Shareholders are generally not personally liable for the corporation’s debts and obligations. Their liability is limited to the amount they have invested in the company.
2. Separate legal entity: A C-Corp exists independently of its shareholders and can own assets, enter into contracts, and initiate legal actions in its own name.
3. Perpetual existence: A C-Corp has a continuous life, even if ownership changes or shareholders leave the company. It can continue to exist indefinitely, unless dissolved or liquidated according to the law.
4. Ownership and governance: C-Corps have a formal structure with shareholders, directors, and officers. Shareholders elect the board of directors, who are responsible for making major decisions and appointing officers to manage day-to-day operations.
5. Capital raising: C-Corps have greater flexibility in raising capital compared to some other business structures. They can issue different classes of stock, such as common stock and preferred stock, which allows for attracting various types of investors.
6. Double taxation: One significant characteristic of C-Corporations is the potential for double taxation. The corporation is taxed on its profits at the corporate income tax rate. When the corporation distributes dividends to shareholders, those dividends are also subject to individual income tax in the hands of the shareholders.

Benefits and advantages of forming a C-Corp

Forming a C-Corporation (C-Corp) offers several benefits and advantages for businesses. Here are some of the key advantages of choosing a C-Corp as a business structure:

1. Limited liability: As identified above, one of the primary benefits of a C-Corp is limited liability protection. Shareholders are typically not personally responsible for the corporation’s debts and liabilities. Their liability is limited to their investment in the company.
2. Access to capital: C-Corporations have an advantage when it comes to raising capital. They can issue multiple classes of stock, such as common stock and preferred stock, allowing for different levels of ownership and potential investment. This flexibility makes it easier to attract investors and raise funds for business expansion, acquisitions, or other financial needs.
3. Perpetual existence: A C-Corporation has a perpetual existence. It can continue to exist indefinitely, regardless of changes in ownership or the death of shareholders. This feature provides stability and continuity for the business, making it easier to transfer ownership or attract long-term investors.
4. Credibility and perception: C-Corporations often have a higher level of credibility and prestige compared to other business structures. This perception can be beneficial when dealing with customers, suppliers, and financial institutions. The “Inc.” or “Corp.” designation after the company name can convey a sense of professionalism and reliability.
5. Employee benefits: C-Corporations can provide various employee benefits, such as health insurance, retirement plans, stock options, and employee stock purchase plans. These benefits can help attract and retain talented employees, fostering a positive work environment and enhancing the company’s competitiveness.
6. Tax-deductible expenses: C-Corporations can deduct a wide range of expenses, including salaries, employee benefits, business equipment, marketing costs, and professional services. This ability to deduct expenses can help reduce the corporation’s taxable income, resulting in potential tax savings.
7. Potential tax advantages: While C-Corporations are subject to corporate income tax, they may have certain tax advantages. For example, they can choose a fiscal year-end that aligns with their business cycle, allowing for better tax planning. C-Corporations can also retain earnings within the company, which may be taxed at a lower corporate rate than the individual tax rates for owners of other business structures.

It’s important to note that the advantages of a C-Corporation should be weighed against the potential drawbacks, such as double taxation and additional compliance requirements. Additionally, the specific benefits can vary depending on the company’s circumstances and the applicable tax and legal regulations. 

How to incorporate a C-Corp

Incorporating a C-Corporation (C-Corp) is a process that involves several important steps to establish a legally recognized business entity. By following these steps, entrepreneurs can successfully incorporate their C-Corp and enjoy the benefits and protections that come with this business structure.

1. Choose a Business Name: Start by selecting a unique name for your C-Corp. Ensure that the name is not already in use by another entity and complies with the state’s naming requirements. Most states require the inclusion of a corporate identifier such as “Inc.” or “Corp.” at the end of the company name.
2. File Articles of Incorporation: Prepare and file the Articles of Incorporation with the appropriate state agency. This document includes essential details such as the company’s name, purpose, registered agent, and the number and type of authorized shares. Pay the required filing fee along with the submission.
3. Appoint Directors and Officers: Determine the initial directors of the corporation. Directors are responsible for making major decisions and appointing officers to manage the company’s day-to-day operations. Ensure compliance with any specific requirements outlined by the state regarding the number and qualifications of directors.
4. Draft Corporate Bylaws: Create corporate bylaws that outline the internal rules and procedures for operating the C-Corp. Bylaws typically cover topics such as shareholder meetings, director duties, officer roles, and voting procedures. It is important to ensure that the bylaws comply with state laws and provide clear guidelines for the corporation’s governance.
5. Issue Stock: Determine the initial stock structure of the C-Corp and issue stock certificates to shareholders. The stock can be divided into different classes, such as common stock and preferred stock, with varying rights and privileges. Keep accurate records of stock ownership and maintain a stock ledger.
6. Obtain Required Permits and Licenses: Research and identify any permits or licenses necessary to operate your specific business. Depending on your industry and location, you may need to obtain federal, state, or local licenses or permits to comply with regulatory requirements.
7. Apply for an Employer Identification Number (EIN): Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). An EIN is required for tax purposes and is used for various business-related transactions, such as opening a bank account or filing tax returns.
8. Comply with Tax and Regulatory Obligations: Understand and fulfill your tax obligations at the federal, state, and local levels. This includes registering for applicable taxes, such as income tax, sales tax, and payroll taxes. Maintain accurate financial records and ensure timely filing of tax returns and payments.
9. Maintain Corporate Compliance: Continually adhere to corporate governance requirements, including holding regular board meetings, keeping corporate records, and filing required reports with the state. Comply with ongoing filing obligations, such as annual reports, and stay informed about any changes in corporate laws or regulations.

Incorporating a C-Corporation involves careful planning and adherence to legal requirements. It is advisable to consult with advisers. Read about some legal obligations of a C-Corp here.

At Norebase, we specialise in incorporation while ensuring utmost compliance and proper execution of the incorporation process.