A C corporation, usually just referred to as a corporation, is one of the classic business entity structures. C corporations are the most commonly used business entities for large and publicly held companies. They can also be used for smaller, privately held companies.
When considering what type of entity you should form for your business, it’s a good idea to get educated first. Each type of entity comes with pros and cons, and you should consider each thoroughly before making a decision. Choosing the wrong business structure can cost you significantly down the road. Here’s an overview of business structures to help get you started. Read on to find out more about C corporation basics.
C Corporation Basics
In C corporations, ownership and management can be completely separate. The corporation sells shares in order to build capital, and shareholders become partial owners of the company. While shareholders own the company, the board of directors, and elected officers, manage the day-to-day affairs of running the business.
The main benefit of a corporation is that it is legally independent of its owners, meaning that shareholders, directors, and officers cannot be held personally liable for the misconduct or contractual obligations of the corporation. An LLC also offers this limited liability for the owners, but it comes with other benefits and sometimes disadvantages as well. This post can help you compare the difference between an LLC and a C corporation.
How to Set Up a C Corporation
It is more complicated to create a corporation than more basic business forms, such as sole proprietorships, partnerships or even LLCs. Corporations are required to file articles of incorporation with the state, keep meeting minutes, draft bylaws, and issue shares to owners. The minimum number of shareholders required to incorporate is just one. But there are quite a few “corporate formalities” that must be dealt with, which means that other business structures may be better for small businesses with just a single owner.
Choosing the state in which you incorporate in is a big decision, one that will affect your filing fees, ongoing fees, and company taxation for the life of your business. States like Delaware and Nevada offer tax incentives to small business owners, but you may end up paying more if you aren’t located in, or doing business in your state of incorporation.
A good lawyer can help you run a cost-benefit analysis for incorporation in different states and help you make a more informed decision about which state to incorporate your business in.
Corporate tax can get thorny. Losses of the business cannot be used as personal tax liabilities for owners, and it is the only business makeup in which income is taxed at the corporate level before being distributed to owners. This results in a phenomenon known as “double-taxation” when owners are subsequently, and additionally, taxed on income from their company through their personal income taxes.
Knowing the best tax structure, and therefore business entity structure, for your business is crucial, and a good tax attorney can end up saving you money in the long and short run.
Transferability of Ownership for C Corporations
A corporation is considered its own entity. As such, it persists after corporate owners die or leave the company. Owners, or shareholders, are permitted to buy and sell stock in the corporation with impunity (barring the creation of a contrary agreement). If you purchase stock, all the rights of ownership possessed by the previous seller are transferred to you.
This ease of transferability is why public companies on stock exchanges are almost always C corporations. The shares of corporations are more freely transferrable than interests in other types of business entities.
Risks and Disadvantages of a C Corporation
Although corporations are typically considered to be separate legal entities, which protects shareholders from personal liability for the actions of the company, there are instances when courts can “pierce the corporate veil” and pursue the personal assets of owners. The rules regulating piercing the corporate veil are different depending on the state of incorporation, and potentially the state in which business is being conducted.
Generally, if the company was clearly created with the intent to do fraud, if formalities in formation and behavior are not observed (e.g., keeping minutes, forming bylaws…), or if assets from the company are comingled with those of owners (e.g., buying yourself a house through the company’s bank account), courts can elect to make owners personally liable for the debts of the company.
Benefits and Advantages of a C Corporation
The benefits of incorporation include great tax breaks, legal protections for owners, and easy access to capital. But the process of filing and running the business becomes much more complicated than other forms, such as an LLC.
Hiring a good corporate or business lawyer is usually the first step you should take. A lawyer can help you navigate this complex business form, and give you the time to focus on making your company great.