Creating a C corporation is one of the smartest ways to grow your business while protecting your personal assets. With a C corporation, you get to define your brand, grow your business more efficiently, and pitch for large, worthwhile projects that you wouldn’t be able to get as a sole trader or partnership. Whether you’ve already incorporated or you’re ready to learn how to start a C corporation, here are some fundamentals you need to know.
Typical characteristics of a US C corporation
A C corporation is a separate legal entity from its owners, meaning that the corporation has its own rights and liabilities.
If you intend to bring on multiple shareholders and investors for your company, a C corporation is an ideal option as it offers great liability protection and a flexible membership structure.
The following characteristics distinguish a C corporation from other types of entities:
- Limited liability protection
As a member of a C corporation (i.e., employees, shareholders, directors, and officers), you are not personally liable for the company’s debts or obligations, which means your assets and properties will be protected in negative events such as bankruptcy or being sued.
- Tax benefits
C corporations may be eligible for tax breaks or exemptions not available to some other types of corporations, such as self-employment tax.
- Fundraising ability
Owning a C corporation allows you to sell stock to outside investors, which provides benefits in terms of capital raising and financing for future growth.
- Formal structure
A C corporation has a formal management structure that defines the roles of directors, the board of directors, and officers. This contributes to your company’s professional brand image and smooth operation.
Unsure if this popular entity is the right business structure for you? Here’s a breakdown of the benefits and drawbacks of forming a C corp.
Factors to consider before setting up your C corp
The decision to form a C corp should not be taken lightly; critical factors such as business goals, structure, and situation, as well as the cost and requirements associated with forming your C corporation, should all be carefully considered.
- Your business size and structure
A C corporation is the best option if you want to raise capital from investors or venture capitalists.
However, if you intend to run a small, private business, such as a family-owned business, forming a C corp may increase your compliance burden and ongoing costs, which may eventually stress you out.
- Your tax planning
C corporations are subject to double taxation, which means that the company will be taxed on its profits and then the shareholders will also be taxed on any dividends they receive from the company.
This may not be the best business entity for you if your level of profitability is low.
- Your budget and time
You’ll need to comply with stringent reporting requirements and corporate responsibility when running a C corp, which means more effort and money put into paperwork and filing.
If you are not willing to bear these additional burdens, a C corporation may not be the best option for you.
- Your exit strategy
If you’re planning to sell your business down the road, forming a C corporation will make the transaction much simpler due to its flexibility in transferring.
Are you wondering if there are any other company entities besides C corporations that would be suitable for you? Try US Business Entity Selection Tool to be more confident in your decision.
Set up a C corporation in the US
Before setting up a C corporation, you should prepare all the basic requirements, including:
- Having at least one shareholder, who can be either a US resident or foreigner,
- Obtaining an Employer Identification Number (EIN) (you can do it after forming your C corporation)
You can form a C corp in a few simple steps on your own, but if you are a foreigner or non-resident, it is highly recommended that you use a Delaware company registration service.
Step 1: Choose a name for your C corporation
The legal name you select must be unique and distinct from any existing business that is already registered in your state of formation.
Make sure you check the availability of the name in advance by referring to the state’s database.
Step 2: Appoint a Registered Agent
Every C corporation must have a registered agent – a person or company who is responsible for receiving legal notices on behalf of the business.
The registered agent can be an individual or a business entity, and you can find one through an online directory or by contacting your state’s Secretary of State office.
Step 3: Draft your articles of incorporation
The articles of incorporation are the official document that establishes your C corporation. They contain basic information about the company, such as its name, registered agent, and purpose. You can find a sample article of incorporation online or through your state’s Secretary of State office.
Step 4: File your articles of incorporation with the state
Once you’ve drafted your articles of incorporation, you need to file them with your state’s Secretary of State office; a Business Bureau, or a Business Agency as required by each State. There may be a filing fee associated with this process, and you will likely need to provide some basic information about your company, such as its name and registered agent.
Step 5: Appoint directors and officers for your C corporation
These individuals will be responsible for running the company and making decisions on behalf of the corporation.
The board of directors is responsible for overseeing the operations of the C corporation, except as may be otherwise provided in the company’s charter or in its certificate of incorporation, while officers manage its day-to-day business activities. It is important to choose individuals who are qualified and knowledgeable about the business, and who share your vision for the company.
Step 6: Hold a meeting of the board of directors to establish bylaws for your C corporation
The bylaws will spell out the rules and regulations that govern your company. They should include information on:
- How directors are elected
- How profits are distributed
- How the company is to be run
- How meetings are to be conducted
- and who is responsible for what.
The requirements for forming and maintaining a C corporation may vary from state to state, so it is important to check with your local government before you get started.
Starting a C corporation can be a daunting task with various requirements and procedures to follow. We hope that this article has cleared your mind about the steps needed to start your own C corporation.
If you have any questions or need more assistance, please don’t hesitate to contact us by clicking the chat box on your right.
Frequently Asked Questions
A corporation and an LLC differ in what ways?
Both types operate as separate legal entities, shielding owners from personal liability. However, a corporation has more formalities and recordkeeping requirements, whereas an LLC has more flexibility in daily operations.
A corporation is taxed as a C corporation by default unless it files to be treated as an S corporation. An LLC, on the other hand, is not limited to a single tax classification; it can be taxed as a sole proprietorship, partnership, C corporation, or S corporation.
Ownership in a corporation is easier to transfer than in an LLC, making it more appealing to investors.
What distinguishes a S corporation from a C corporation?
A C corporation can have as many shareholders as it wants, whereas an S corporation can only have a maximum of 100 shareholders.
A C corporation can offer different classes of shares, but a S corporation cannot.
Is it possible to convert an S corporation to a C corporation?
Your company is already a C corporation before you decide to incorporate as an S corp to benefit from the S corp tax status. So all you have to do is send a letter to the IRS offices in your area to terminate your S corporation status. This letter contains the following details:
- Name of the business
- The Tax ID number
- Shares outstanding
- The authorized signer’s signature on tax returns
- The majority shareholders’ consent to revoke S corp
- And so forth.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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