The word “corporation” may be known generally as a synonym for a big business, but there’s more to it than that. In Delaware, a C corporation is a type of business entity that offers its owners limited liability protection. Establishing a C corp in Delaware is a popular choice for businesses because the state offers a number of key benefits, including favorable tax laws and robust business infrastructure.
Our guide to C corps covers what they are, how they’re different, and what they can do for your business.
1. Overview of Delaware C Corporation
1.1. What is a C-Corp?
A C corporation is a type of corporation that is formed under the laws of Delaware. It is one of the most popular types of corporations in the United States and is often used by businesses that are looking to raise capital or go public.
The letter ‘C’ in C corporation means it’s bound by the rules and regulations of subchapter ‘C’ of the Internal Revenue Code.
C corporation is different from other structures, such as an S corporation or limited liability company because it must pay both federal and state taxes.
While other structures require shareholders to pay taxes only on profits they get, C corp may be subject to double taxation as profits must be paid by both the firm and the shareholders.
1.2. Is C-corp the right fit for your business?
To answer this question, you’re recommended to seek legal advice and guidance from professionals, but in the meantime, a summary of the pros and cons might steer your business in the proper direction:
- Pros of C corp
Flexible ownership – no major restrictions on who can own shares, meaning individuals and entities both in and outside the United States can obtain ownership of a C corporation.
Limited liability for all shareholders, directors, and officers.
Easy capital raising – venture capitalists and investors prefer to put money in C corps over S corps because this type of structure allows for wider ownership of the corporation.
No limit on the number of company shareholders.
Ability to issue more than one class of stock.
Lower tax rate compared to S-corps, sole proprietorships, and partnerships.
- Cons of C corp
Delaware C Corporations are the most complex type of business, which makes them better suited to larger businesses looking to raise capital or go public on stock markets.
Double taxation – C corp’s profit is taxed twice – once under a corporate income tax with a federal tax return (Form 1120) and again on personal income level for any gains realized from dividends.
No personal write-offs, meaning shareholders can’t deduct business losses on personal income statements. You can only deduct these losses on the corporation’s tax return.
More regulations and obligations, including corporate formalities and more complex compliance, legal, and tax rule.
Higher cost for setting up and maintaining the business operation.
2. What are the key features of C Corporations?
In terms of tax liability, C Corporations are separate from owners, meaning that the business itself is taxed on its profits, and you as a shareholder, will be taxed when receiving dividends.
- Limited liability
Owners and shareholders of a C corporation receive limited liability protection, which guards their personal assets should the company incur debts or legal issues.
For instance, if there is debt or a suit filed against the corporation, lawyers cannot go after your personal assets to settle those debts and liability lawsuits. This is a stark contrast to sole proprietorships, in which your money and your company’s money are the same, and if the business is sued, so are you – placing your assets at risk.
- Separate legal entity
C corp’s liabilities and debts are separated from the liabilities of the directors, investors, and shareholders, meaning they aren’t personally liable for the business’s obligations, and their personal assets won’t be at risk.
This doesn’t apply in all cases like if corporate funds are misused, there is willful fraud or certain rules and regulations aren’t followed.
- Easier to go public
If you want to grow and expand your company, going public is one option. C corporations have an easier time going public than other business structures because they can sell shares.
- Raising capital
C corporations can offer different types of stock, which makes it easier to raise capital, issue bonds, and take out loans.
If these features have piqued your interest somewhat, and you want to start your own C corporation, read our guide to registration here.
3. What are the obligations of C Corporation?
Forming a C Corporation comes with certain obligations. Requirements can come from various bodies including the federal government, the DE Division of Corporations, and elsewhere.
- File annual reports and pay taxes
C corporations in Delaware are required to file annual reports with the state. This report must include information on the corporation’s finances and activities over the past year. Additionally, c corporations are required to pay state and federal taxes. Be sure to consult with an accountant or tax attorney to ensure you’re paying the correct amount of taxes.
- Get the right permits and licenses
Before you form your Delaware C corporation, you’ll need to obtain the proper permits and licenses for your business. This will vary depending on the type of business you’re running and the state in which you’re operating. You can typically find information on the permits and licenses you’ll need from your local Chamber of Commerce or Small Business Administration (SBA) office.
- Hold an annual general meeting
All Delaware C Corporations are required to hold an annual general meeting (AGM). At this meeting, shareholders will elect the corporation’s board of directors and discuss any other business that needs to be addressed. AGMs can be held in person or by proxy, and minutes from the meeting should be kept on file.
- Be sure to comply with corporate bylaws
Once you’ve got your business up and running, it’s important to stay in compliance with Delaware corporate bylaws. These bylaws outline the rules and regulations for running a c corporation in Delaware, and failure to comply can result in serious penalties.
- Delaware corporation tax registration
All c corporations in Delaware are required to register with the state’s Department of Revenue. This registration must be renewed on a yearly basis. To register, c corporations will need to submit a completed Corporation Tax Registration form, along with the appropriate fee.
- Maintain corporate minutes
In order to keep your c corporation in good standing, you’ll need to maintain corporate minutes. Corporate minutes are a record of the decisions made by the corporation’s board of directors and shareholders. These minutes should be kept in a safe place, such as a corporate minute book, and should be made available to shareholders upon request.
- File an annual franchise tax report
In addition to the annual corporate tax return, Delaware C Corporations are also required to file an annual franchise tax report. This report must be filed with the state’s Division of Corporations on or before March 1st. The report must include information on the corporation’s finances and activities over the past year.
Running a Delaware C Corporation can be complicated, but with the right planning and organization, it can be a smooth process. Be sure to familiarize yourself with the state’s corporate bylaws and tax regulations, and consult with an accountant or attorney if you have any questions. By following these simple tips, you’ll be on your way to running a successful c corporation in Delaware.
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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