Guide to C Corporations
There are different types of corporations, such as LLCs, S Corporations, and C Corporations. However, to learn which one best suits your needs, it’s essential to understand what they are. With that said, in this article, you will learn about C corporations – from what they are to how to form your own.
What is a C Corporation?
A C Corporation is an entity that is taxable but legally separate from the shareholders or the owners. The entity derives its name from the subchapter C of the internal revenue code that specifies how it should be taxed.
C Corporation is the default form of a corporation because any corporation has an independent legal entity although owned by shareholders. A corporation’s independence means that the corporation will still exist whether the shareholders change or not.
A corporation is different from other types of businesses, such as a partnership or a sole proprietorship, because the members will determine their existence. Taxes in a C corporation are changed depending on the business’s income.
C Corporation owners can only be charged depending on the value of their investment. In case the C Corporation engages in debts and closes, the owners can only lose their investments but are not in any way individually liable for the debts.
Similarly, the corporation does not have an obligation to pay the debts or any other shareholders’ financial commitments. Therefore, the corporation has separate legal rights and can own assets, enter contracts and lawsuits, just like an individual.
The corporation can raise funds by issuing stocks to increase its net worth. It stands at a better chance of expanding than other types of businesses.
Who are the owners of a C Corporation?
The owners of a C Corporation are individuals who buy stock shares and become the shareholders. The entity can have as many shareholders as it wishes unless it chooses to have its own rules. It can have thousands of shareholders if it wishes, unlike the S corporation which only allows a limited number of shareholders.
A C Corporation’s considerable number of shareholders allows the business to open up for more opportunities because it has more investors and funds. At any given time, shareholders can be added or changed to create space for more funds.
The shareholders of a C Corporation own voting rights and can vote for some of the members to become the board of directors. The chosen group will form a part of the company’s management and be involved in the business’s decision-making process.
Each C corporation will determine the number of votes that each share will hold. The corporation will also determine the number of classes of shares it will have. This is different from S corporations that have only one type of shares. For instance, class A shares can have more voting rights than class B shares.
Who leads a C corporation?
The members that lead the C Corporation are known as the board of directors. They are voted in by the shareholders. However, the articles of incorporation give a guideline on appointing the initial directors of the corporation.
In a C corporation, the board of directors has the duty of running the business. Their duties are specified by the laws that govern the board members’ actions. Therefore, they cannot run the entity using individual rules but only those set in the corporation.
The board of directors provides guidance and insights on the best way to operate and run the business. The board will have a chairperson, a vice-chair, a secretary, and a treasurer. The board members have an obligation of putting the interests of the corporation first and avoiding any issue that could create a conflict of interest.
Personal interests should not influence the decisions made by the board members. The corporate board organizes the shareholders’ annual meeting and includes an annual report outlining the business’s financial status.
How is a C corporation taxed?
Like an individual, the C Corporation will pay its income taxes according to the income tax returns. The rule of double taxation applies in a C Corporation. This means that the corporation files returns with the Internal Revenue Service and is taxed independently from the shareholders’ dividends. Income in a C corporation is taxed twice.
After the company has generated income by deducting various costs and expenses, it will be taxed. The C Corporation will also issue dividends to its shareholders after paying taxes from the revenue generated. The dividends will still be taxed from the shareholder’s side. On the other hand, shareholders of a C Corporation can avoid the double tax. They can do this by leaving the company’s profits in the business.
How is a C corporation formed?
To form a C Corporation, one must undergo a series of steps. All steps should be followed to the core for it to be regarded as a C Corporation.
The first step will be selecting a corporation name that ends with the word corporation. Some names might be already in use, and therefore, it is critical to countercheck with the state business office. Choosing about five names will be alright so that if one gets rejected, you will have alternatives.
The second step will be choosing the director of the corporation. If a group is just starting, it can select one person to act as a director.
Articles of Incorporation
The next step involves filing articles of incorporation. This will require a filing fee according to the state’s corporate tax rate. After this, the company will write the company bylaws to guide the business’s operations.
The bylaws will be in written form and indicate voting rights and board meetings. The company can also proceed to register for business licenses and taxes.
The next step will be issuing stock which will be made available through share certificates. Shareholders can purchase them online or either at the location of the office. The share will show the ownership of the shareholders in the corporation.
The next step will be to ensure that the directors’ meetings occur as specified in the company’s bylaws. The first meeting will approve the bylaws and ensure that regular meetings are held.
Getting help forming your C Corporation
Forming a C Corporation might sound complicated when you do not have enough reasons to need it and you do not know where to start. Getting professional help in making such a decision will be essential because it will help you get familiar with the formalities.
The first thing a professional will do is guide you by outlining the pros and cons of having a corporation. For instance, you need to understand if the business will withstand double taxation. The professional will offer alternatives for avoiding it as well.
Therefore, you need to have enough knowledge and decide your business’s best route. Furthermore, not all large businesses make large profits. A well-planned strategy will help you garner maximum benefits for your business.
On the other hand, you should consider a C corporation’s benefits, such as separate legal and fiscal responsibilities and strong credibility.
After choosing a C Corporation, the professionals can handle all the paperwork. A professional will ensure that your business complies with the state’s law. For instance, they can help in filing the articles of incorporation and filing tax returns. Professionals will handle all the work from finding a corporation name to issuing stock and setting the first meeting.
Professionals will also advise on the best way to handle the corporation’s steps and ensure that it is operating. This help will minimize worries about compliance with the government. Besides, they can also help in more straightforward advertising stock shares and get your business running quickly.