A C corporation, sometimes called a C corp, is a tax designation which takes its name from Subchapter C of the IRS’s Internal Revenue Code. Most C corps are corporations–largely because corporations are automatically taxed as C corps by the IRS. Because corporations and the C corps are so closely connected, it’s important to understand what a corporation is and how it works.
Corporation Overview
A corporation is a business structure that enables its owners to establish their company as a separate legal entity, and as such, corporations are wholly separate from the people who own and operate it.
Advantages of a Corporation
Limited Liability: Corporations offer limited liability protections, meaning that owners are insulated from lawsuits and liens, which in principle, protects assets such as house, cars, and bank accounts from being used to settle business debts or lawsuits.
Raising Capital: Corporations allow for the selling of stock in order to raise capital to scale the business.
Share Transferability: For growth, companies that want to expand beyond their initial constraints often go with a corporation, usually a C corp. Shares of stock are easy to sell and transfer, unlike membership in an LLC. Most venture capital funds can’t invest in pass-through entities like LLCs because they may have tax-exempt partners who don’t wish to muddy the waters of their finances.
Perpetual Existence: Corporations exist in perpetuity, meaning that if an owner wishes to sell their stake, or unfortunately passes away, the business will continue to exist.
Prestige: Just the name “corporation” gives a business prestige. Your neighborhood carpenter may have an LLC, but they get their supplies at a corporation like Home Depot.
C corp vs. S corp
A corporation is automatically taxed as a C corp, but the business can file an IRS election to be taxed as an S corp instead. There are some key differences to each tax designation.
A C Corp can have as many shareholders as it wants, while an S Corp must adhere to a maximum of 100. This gives the C Corp a leg up when it comes to raising capital from investors. Not only can its sell shares to a large pool of investors, but additional funds can be raised if the corporation decides on making more stock available to sell.
Speaking of shares of stock, an S Corp can only issue one class of stock to its shareholders, whereas a C Corp can offer various categories of stock (common and preferred being the two most common. Where an S Corp must be owned by US citizens or legal residents, a C Corp can be owned by anyone from any nationality. This hampers the S Corp in that the C Corp is able to have access to a diverse group of investors.
It should be noted that LLCs are pass-through entities, which means the company profits get taxed at the individual level, and only once. A corporation is viewed by the IRS as a separate entity, which means the corporation must pay taxes on it’s profits, and then when those profits are distributed to shareholders, they get taxed again. The wrinkle is that shareholders only get taxed if profits are distributed, so in this regard a corporation will see a tax benefit by reinvesting profits into the corporation. This is especially advantageous for new corporations, who are looking for long-term growth versus short term gains.
How to Start a Corporation
All states and jurisdictions require a potential corporation to file legal paperwork in the state where the corporation plans to do business. You do this by filing “Articles of Incorporation” with the Secretary of State. Fees vary by state, and in a few cases they are linked with how many shares of stock a corporation plans to issue. Once all the paperwork has been signed and accepted, your corporation will be legally and officially formed. Of course you’re not done yet, as there is a laundry list of actions beyond the initial paperwork. In order to break it down and try to make the formation process a little less scary, here’s a basic checklist of what you need to do in order to successfully form and run a corporation.
- Select a corporate name and file the articles of incorporation.
- Appoint or elect corporate officers.
- Draft corporate bylaws.
- Write a shareholder’s agreement.
- Hold a board meeting and take minutes.
- Issue shares of stock.
- Obtain an EIN (Employer Identification Number)
- File a Beneficial Ownership Information (BOI) Report
- Open a bank account, or accounts, for your corporation.
- Research and obtain all necessary licenses and permits.
- File taxes and all necessary reports with your state or jurisdiction.
What are Articles of Incorporation?
A corporation’s Articles of Incorporation flesh out its planned structure. They also include the name and addresses where the corporation will receive service of process for all-important legal documents.
Each state handles their Articles differently with regards to the amount and type of information required, but generally a corporation can expect to include:
- Corporate name
- Main activity of the company
- Business address
- Registered agent address
- Registered office address
- Name and address of corporate officers
- The number and value of shares
What is a Corporate Officer?
Corporations generally have a three-tier structure. The first is ownership, or shareholders, that typically own the corporation. Ownership elects the second tier, otherwise known as the board of directors. The board then appoints the third tier, known as corporate officers. Officers don’t have to be shareholders, but often they are either shareholders or compensated with shares of the corporation. Check out our list of corporate officer titles and what is required of each position:
- President/Chief Executive Officer (CEO): The CEO is captain of the ship. They set the overall path and vibe of the company. When things go well the CEO gets praise. If things don’t go well, the CEO is held responsible. Tough job, but excellent benefits!
- Treasurer/Chief Financial Officer (CFO): The CFO is responsible for the corporation’s budget, accounting, investing, and forecasting of future financial impediments or economic trends.
- Secretary/Clerk: They are responsible for keeping corporate records, recording minutes, and basically making sure formalities are met with regards to board meetings and voting rights.
- Chief Operations Officer (COO): The COO is in charge of the day-to-day activities, often overseeing the company’s Human Resources Department (HR).
What are Shareholders?
The shareholders of a corporation are those people or businesses that own pieces of the corporation (stock), and thus have a financial investment in it. When the company does well, shares of a company’s stock can rise, creating value for shareholders. If a company performs poorly, stock prices can fall. Since shareholders own pieces of the corporation, they are also responsible for electing the corporation’s board of directors.
What are Corporate Bylaws?
A corporation’s bylaws are its constitution. The bylaws generally lay out the responsibilities of each corporate officer, voting rights for shareholders, and policies regarding dividends, tenure, financial records, and how the corporation will address any changes or emergencies that may arise.
How Many Shares of Stock are Required?
A corporation cannot exist unless it authorizes at least one share of stock. This doesn’t mean that if you decide to authorize 10,000 shares that you have to issue them. Think of it this way, when you cut up a pizza into eight slices, you’ve authorized that number of slices. When you hand them out to your friends, you are in essence issuing those shares of stock, or in this case, yummy yummy pizza.
C Corps can have an unlimited number of shareholders, and can remain private or go public, in which case their stock will be listed on a stock exchange. This means that the general public can purchase ownership, through stock, in the corporation. This ability to raise money through shares of stock makes corporations particularly alluring for big money investors. This does not mean that a corporation has to go public. In fact some of the largest US corporations are privately held. This allows them full control over who purchases shares and becomes an owner. Cargill, Koch Industries, and Albertson’s are just a few that continue to remain private.
Does My Corporation Need an EIN?
Your corporation definitely needs an EIN (Employer Identification Number) for all federal tax filings and in order to open a bank account. You’ll also need an EIN in order to apply for state licenses and any business permits your corporation might need.
Does My Corporation Need to File a Beneficial Ownership Information Report?
Most likely. Although there a few exemptions, most corporations must file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) beginning January 1, 2024. Companies formed during 2024 have 90 days to file their BOI report, and companies formed before 2024 have until January 1, 2025 to file theirs. Beginning in 2025 all companies will have have 30 days to file. On your report, you’ll need to provide information on (a) your business and (b) the individuals who have substantial control over business decisions or who own 25% or more of your company. This includes legal names, addresses, and personal or tax ID information—however, the details shared on your report will not be made available to the public (unlike state filings). You can file this report online through FinCEN. Or, for a modest fee of $9, you hire us to file it for you.
Does My Corporation Need a Bank Account?
When you form your corporation it will become its own entity, and it will need a way to accept payment and pay employees. In order to accept payment you’ll need a bank account. Opening a bank account for your corporation typically requires your Articles of Incorporation, corporate bylaws, and your EIN. Having a corporate bank account solidifies your business’s ability to accept payment and pay employees.
Why Does A Corporation Need Licenses and/or Permits?
No matter how big or small you plan to grow your corporation, every state and jurisdiction is going to require you to jump through some hoops to obtain proper licensing. Even home-based businesses often have to obtain local home business permits. Because laws vary, it is the responsibility of the corporation to talk to state and local agencies in order to find out what paperwork (and of course fees) needs to be submitted and approved.
What About Taxes?
A C Corp’s profits, minus deductions (employee salaries, health benefits, travel expenses, debt, interest payments, and sales and excise taxes) are taxed federally at 21%. C Corps will also pay state taxes in most states, with corporate tax rates ranging from 3% in North Carolina, to 12% in Iowa. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming levy no state income tax.
What are Annual Reports?
Almost every state requires businesses that operate within their borders to provide information that summarizes the company’s past year. The annual report is an opportunity for a C Corp to let the state know if any changes have been made to its operating or financial structure. In some cases, states only ask for a report every other year, and in one case (looking at you Pennsylvania) every ten years.
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