When starting a small business, it can be advantageous to structure your company as a C-corporation. Corporate business entities have several benefits in terms of taxes, liability, and the ability to raise money. Plus, incorporating your company sends a positive sign to investors and customers about the legitimacy of your business.
Although you can elect to structure your business as an S-Corp, C-corps are the traditional corporate structure. Wondering if a C-corporation is right for your business? We’re here to help. In this guide, we’ll break down everything you need to know about this entity type to help you determine the best legal structure for your small business.
The Ultimate Guide to C-Corps
What Is a C-Corporation?
As we mentioned, a C-corporation is the standard type of corporation—in other words, it’s an independent legal entity that exists separately from the business owners.
This being said, to better understand what C-corps entail, we can break down their characteristics into four main categories: management structure, liability protection, tax treatment, and regulations.
Management structure: First, C-corps have a tri-level management structure:
- Shareholders who hold stock in the company own the business.
- The shareholders elect a board of directors to make decisions on major company issues.
- And on a daily basis, board-appointed officers—such as the chief executive officer and chief technology officer—run the business.
Liability protection: With this in mind, because C-corps are separate entities from their owners, shareholders enjoy limited liability protection under the law. Therefore, creditors and anyone who sues your business can only lay claim to the company’s assets. Of course, if you’ve personally guaranteed a business loan, then your personal assets are on the line.
Taxation: Next, in terms of taxation, C-corps are the only type of business that must pay a company-level income tax. This is in contrast to an S-corp, which is a pass-through entity that lets shareholders report profits and losses on their personal tax return.
After the passage of the Tax Cuts and Jobs Act—more popularly known at the Trump Tax Plan—the C-corp tax rate is a flat 21%. Shareholders also have to pay personal taxes on corporate dividends. Many people refer to this as double taxation. Despite the disadvantage of double taxation, corporations can take some unique tax deductions that aren’t available to other types of companies.
Regulations: Finally, when it comes to regulations, C-corps have many more formalities to adhere to in comparison to other business entity types. On top of formally registering with the state, C-corporations must observe corporate protocols, such as adopting bylaws, filing an annual report, and holding director and shareholder meetings.
Additionally, one of the most beneficial formalities associated with C-corps is that they can issue stock to shareholders to raise capital. Plus, unlike S-corporations, which come with several limitations on stock issuance, C-corps have virtually free reign over their stocks.
There’s no limit on the number of shares that a C-corp can issue, and a C-corp can have multiple classes of stock. Shareholders can be citizens, residents, non-resident aliens, or other companies.
How Does a C-Corporation Work?
Now that you have an understanding of the features that make up a C-corporation, let’s review how this business structure actually works.
Unlike a sole proprietorship, you can’t simply start a business and operate as a C-corp—instead, because a C-corporation is incorporated you have to complete a specific process to begin operating. First and foremost, this means you need to register your business with your state in order to run a C-corp.
To this point, as we highlighted above, because C-corps are independent legal entities (recognized by the IRS as separate taxpayers) there are much more stringent requirements for formation and operating in comparison to other entity types.
This being said, when it comes to starting and operating a C-corp, the requirements you’ll need to follow will vary based on your state. However, in most cases, C-corps will need to do the following:
- Adopt corporate bylaws
- File an annual report in the state where you’re incorporated and in states where you do business
- Hold shareholder, director, and special meetings
- Document meeting minutes and resolutions
- Maintain separate business finances
- Document company transactions and contracts in writing
- Record the issuance of new stock in the company’s general ledger and balance sheet
- Pay annual taxes and (in some states) a franchise tax
Ultimately, if you have questions about your state’s specific C-corp requirements, you can contact your state’s secretary of state office or business filing agency for assistance.
C-Corps vs. Other Entity Types
As we mentioned above, C-corporation is the standard type of incorporated business—but it’s not the only type. If you’re looking to incorporate, you can choose between a C-corp and an S-corp. On the other hand, of course, there are several other popular entity types to consider when starting your business.
What are the differences between a C-corp and other common business structures? Let’s break it down using the categories we discussed above:
How C-Corps Compare to Common Entity Types
|Type of Entity||Management Structure||Liability Protections||Tax Treatment||Regulations|
Incorporated business composed of shareholders, directors, and officers
Must pay corporate taxes (but also taxes on dividends)
High-level of regulations
Unincorporated business with one owner or jointly owned by a married couple
Taxed at personal tax rate
Very few regulations
Unincorporated business with two or more owners
Taxed at personal tax rate for each partner
Very few regulations
Registered business with limited liability for all members
Choose tax treatment; can be taxed as corporation or pass-through entity
More regulations than unincorporated businesses but fewer than C-corps or S-corps
Incorporated business that is taxed as a pass-through entity
Taxed at personal tax rate of shareholders
High level of regulations, akin to C-corps
As you can see, as C-corps and S-corps are both incorporated entities, they share the greatest amount of similarities. This being said, however, the biggest differences between the two are that with S-corps, you must specifically file for formation (using IRS Form 2553), you’re taxed as a pass-through entity, and there are more regulations for shareholders and issuing stock.
Use our guide to compare S-corps vs. C-corps in more detail.
C-Corporation Pros and Cons
So, with the various entity types out there, why would you decide to form a C-corporation?
Ultimately, C-corps are one of the most well-known entity types, but there are both pros and cons associated with starting this type of business:
- Issue unlimited shares of stock to raise capital
- Preferred business structure for venture capital investors
- Shareholders have limited liability protection
- Shareholders can share in the company’s profits with dividends
- Save on payroll taxes by shifting salary to dividends
- Signal to the public that you’re a legitimate business
- A corporation has a perpetual life, so it outlasts you and other shareholders
When it comes down to it, a C-corporation is a good choice of business structure for companies that are growing fast and planning to raise money from investors. Investors prefer C-corps because there are no limits on the number and class of shares you can issue. This can be a big advantage for small businesses with ambitious expansion plans.
Additionally, whereas many other entity types do not provide liability protection, one of the biggest advantages of C-corps is that they’re separate legal entities—meaning shareholders are protected from possible lawsuits or being held responsible for business debts.
Of course, there are also disadvantages associated with C-corps, including:
- Double taxation from corporate-level income tax and shareholder level dividend tax, which can increase your tax bill
- Can’t write off company losses on your personal tax return
- Costly and time consuming to meet corporate formalities
Without a doubt, one of the biggest cons to forming a C-corp is the prospect of double taxation (the 21% C-corp tax rate on income, plus taxes on dividends). This being said, C-corps do have other tax benefits—like being able to deduct fringe benefits.
For smaller businesses, however, perhaps the most difficult part of considering a C-corp is the costs and process associated with starting and maintaining a corporation. In this case, smaller businesses might opt for an LLC vs. a corporation—as LLCs offer some of the same protections of a corporation, without the larger costs and corporate formalities.
How to Form a C-Corporation
Finally, if you think a C-corp might be right for your business, you’ll want to know how to form one.
In short, in order to form a C-corporation, you’ll need to file documents with your state’s secretary of state or business filing agency. This process is called incorporation.
Here are the basic steps to create a C-corp:
- Register your business: Before you can file for incorporation, you’ll want to take some initial steps to get your business set up. Namely, you’ll want to obtain necessary business licenses, select a registered agent, and choose a name for your corporation that adheres to state laws.
- Draft and file articles of incorporation with the state: Also called a certificate of incorporation or corporate charter, your articles of incorporation is a document that contains basic information about your company and formally establishes your corporation.
- Apply for an Employer Identification Number: C-corporations must apply for an EIN from the IRS. Applying for an EIN is quick and free.
- Adopt bylaws: Some states require corporate bylaws, and even if you’re in a state that doesn’t, it’s important to create bylaws. Bylaws outline the rules for how your corporation is run.
- Adhere to corporation formalities: Among other actions, you’ll want to take, you should start by creating a corporate record book and holding your first board meeting.
Use our step-by-step guide to learn how to incorporate your business in more detail.
Ultimately, many small business owners choose to make all the necessary corporate filings on their own.
This being said, however, you can also employ a business attorney for help or use an online legal service like LegalZoom or IncFile. Of course, with a lawyer or online legal service, you’ll need to pay their fees in addition to mandatory state filing fees.
The Bottom Line
At the end of the day, the C-corporation is a very popular business structure, both among small startups on one end and large Fortune 500 firms on the other end of the spectrum.
As we’ve discussed, C-corporations offer limited liability for shareholders and let you issue unlimited shares of multiple classes of stock, making this a very versatile business structure if you want to raise money. Although you do have to be cautious about the prospect of double taxation, C-corps offer plenty of other tax advantages.
Therefore, if you think a C-corp is right for your business, you’ll want to look into the regulations in your state to begin the incorporation process.
On the other hand, if you’re still unsure of which entity type is best for you, we’d recommend consulting with a business attorney—they can work with you to determine which business structure will be most beneficial for your company.
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