C-Corporations Formation

A C Corporation is one of several ways to legally recognize a business for tax, regulatory and official reasons. A C Corp is simply a way to structure ownership of a business, and contrasts with other popular business structures including Limited Liability Companies (LLCs), S Corporations, Sole Proprietorships and others. It’s is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.

C-corps can be compared with S corporations and limited liability companies (LLCs), among others, which also separate a company’s assets from its owners, but with different legal structures and tax treatment.  A newer type of organization is the B-corporation (or benefit corporation), which is a for-profit firm but different from C-corps in purpose, accountability, and transparency, but aren’t different in how they’re taxed.

Organizing a C Corporation

The first step in forming a C corporation is to choose and register an unregistered business name. The registrant will file the articles of incorporation with the Secretary of State according to the laws of that state. C corporations offer stock to shareholders, who, upon purchase, become owners of the corporation. The issuance of stock certificates is upon the creation of the business.

All C corporations must file Form SS-4 to obtain an employer identification number (EIN). Although requirements vary across jurisdictions, C corporations are required to submit state, income, payroll, unemployment, and disability taxes. In addition to registration and tax requirements, corporations must establish a board of directors to oversee management and the operation of the entire corporation. Appointing a board of directors seeks to resolve the principal-agent dilemma, in which moral hazard and conflicts of interest arise when an agent works on behalf of a principal.

Creating a C Corporation is more complicated than forming a limited liability company or a sole proprietorship, but there are several tax benefits your company could enjoy.

It is a brief guide for creating a C Corporation, which also is called a regular corporation. Please consult financial and tax advisers for more detailed information.

A C Corporation:

• Is not a personal tax liability for its owners
• Has a more complex structure than a limited liability company
• Is legally independent of its owners
• Has a board of directors and shareholders

Benefits of a C Corporation

C corporations limit the personal liability of the directors, shareholders, employees, and officers. In this way, the legal obligations of the business cannot become a personal debt obligation of any individual associated with the company. The C corporation continues to exist as owners change and members of management are replaced.

A C corporation may have many owners and shareholders. However, it is required to register with the Securities and Exchange Commission (SEC) upon reaching specific thresholds. The ability to offer shares of stock allows the corporation to obtain large amounts of capital which may fund new projects and future expansions.

Setting up a C Corporation

A C Corporation is established with state authorities and must abide by corporate laws in the state where it is incorporated. Experts recommend that small-business owners establish corporations in their home states. Check which agency handles this in your state. The secretary of state’s office often registers corporations.

To form a C Corporation, you will need to register your business name, file a certificate of incorporation, or articles of incorporation, and pay a fee. You will also need to draft corporate bylaws and hold a board of director’s meeting.

1. Select and obtain a corporation name.

Your first step in establishing a C corporation is to select a company name. This may not be as easy as it sounds.

First, your company name should end in “Corporation,” “Incorporated,” “Limited,” or an abbreviation of one of those words.

2. Appoint officers to the corporation.

At a minimum, you need a director for your corporation. If you are a small business owner, you may choose to make yourself the only director. This is also the time to select and identify any officers in the business. Again, if you are a solo business owner, you can designate yourself the only officer of the corporation.

3. File articles of incorporation with the state.

In addition to reserving a company name, you need to file articles of incorporation with the state. Some states refer to articles of incorporation as a certificate of incorporation. Other states use the word “charter.” Contact the Secretary of State or other comparable authority to determine the title of the forms your state of incorporation requires. You can get copies of the forms from the Secretary of State’s office. Business owners may choose to fill out the forms themselves. However, because they must be legally correct in order to be valid, many people choose to hire an attorney for this step.

4. Write company bylaws.

In order to have a corporation, there must be bylaws that detail the rules and guidelines for operating the business. At a minimum, bylaws should indicate who can vote and when to hold directors’ meetings. Some smaller businesses make the mistake of skipping this step. The owner might think that because they are the only officer and director, there is no need to waste time writing down the fact that they are the only one who can vote or decide when to meet with themselves about the company’s business. However, skipping this step can be fatal to the establishment of a C corporation. The company bylaws must be written, no matter how silly it might seem.

5. Issue stock.

Often, new business owners select a C corp. because of the benefits of issuing stock. However, this cannot be in name only. A business owner must actually issue shares of stock. Blank share certificates are available for purchase at office supplies stores or online. These shares indicate the percentage of the corporation each stockholder owns. In a single-person business, the owner would own 100 percent of the shares of business stock.

6. Hold directors’ meetings as detailed in the bylaws.

Bylaws are not simply a document to write and then ignore. Directors’ meetings must take place according to the schedule listed in the bylaws. The first meeting must include the approval of the bylaws. Minutes of every meeting must be kept in writing. The corporation must preserve these minutes and make them available upon request. Regular meetings of the directors must continue on the schedule detailed in the bylaws, or the company risks losing C corp. status.