C corps are among the most common business entities for both bigger and smaller businesses. Their popularity isn’t surprising considering they come with a myriad of benefits. If you’re considering forming a C corp and you’ve asked yourself: “what is a C corp?”, our article will help explain the intricacies of this type of business structure and all the advantages and disadvantages that come with forming one.
In addition to offering an overview of the pros and cons, we have also included a section where we go over the crucial steps you need to take to form a C corp, such as selecting a board of directors and filing articles of organization. At the end of our article, you’ll find a detailed FAQ section where we elaborate on some common dilemmas among entrepreneurs.
Without further ado, let’s start by defining C corps.
What Exactly Is a C Corp?
A C corp, the most common type of corporation, is a business structure that allows the taxes of the business to be separate from those of its members. Additionally, it is considered to be a separate entity from its owners, meaning it provides limited liability for its owners and shareholders. In other words, in case of a claim, lawsuit, or debt, the owner’s personal assets will be protected.
The corporation’s shares can be owned by other members, businesses, and entities, and there are very few restrictions in terms of who can own shares, which is one of the benefits of forming a C corp. The C corp is named after a subchapter of the Internal Revenue Code – subchapter C – which describes tax designation.
A C corporation entails a board of directors who oversee the operations in the corporation, make decisions, and are in charge of the business’ daily operations.
So, what are the advantages of forming one?
Advantages of Forming a C Corp
There are many advantages that come with forming a C corporation.
Limited Liability
As we mentioned in our introduction to C corps, all the owners of a C corp have limited liability. The corporation is seen as a separate legal entity from its owners, allowing them to be protected in case of a debt or a lawsuit. This is a very significant advantage for entrepreneurs who don’t want to put their personal assets up for grabs. Only the capital that the owners invest in their corporation can be subject to loss.
Unlimited Amount of Owners
Another major benefit of owning a corporation is that there are no limits as to how many members it can have.
Easier to Attract Investors
C corps are seen as more credible than sole proprietorships and partnerships because they can sell volume shares to potential investors. Generally speaking, investors prefer owning shares of a corporation instead of owning LLC membership interests. In addition, they’re attracted to the fact that there is no limit to the number of owners a C corp can have. What also attracts investors is that the ownership and management is more clearly defined.
Another benefit of being deemed as more credible than other business structures is that C corps have an easier time attracting investors than other business structures. Plus, they’re well-respected by potential suppliers and vendors, which is always a plus.
One thing to keep in mind is that when a corporation reaches 500 or more shareholders and it has $10 million or more in assets, it needs to be registered with the SEC.
Easy Transfer of Ownership
Unlike sole proprietorships, C corps continue to exist after its original owners are not active or alive. Additionally, the ownership of the corporation is easily transferable because it’s based on the sale of stock each member has. In case the members decide that the C corp needs to be sold and is no longer making profit, the division of the assets and the ownership transfer will be pretty straightforward.
Lower Risk of Audit
Another advantage that’s attractive to both potential C corp owners and investors is the low risk of audit. Compared to other business structures like sole proprietorships, C corps are audited less frequently.
Easy Sale of Shares
The number of shares a shareholder has determines not only the profit that shareholder can potentially get but also how many management rights they have. In case shareholders decide that they want to sell their shares, the transfer of shares can be done seamlessly.
Shareholders Aren’t Heavily Involved in Management
As we stated earlier, C corps are managed by a board of directors who operate the business and handle the day-to-day intricacies. Shareholders have an obligation to vote when necessary and elect or remove members of the board of directors. Otherwise, their input is limited to owning shares and gaining financial benefits from the shares. This type of management is a great option for entrepreneurs who want to have an investment in a business, but don’t want to be too hands-on.
Lower Maximum Tax Rate
While there are certain disadvantages that come with forming a C corp, such as double taxation (which we will go over later), there are also some advantages that can be enjoyed from the manner in which this type of business structure is taxed. For instance, it has a lower maximum tax rate compared to proprietorships and partnerships.
Additionally, any business expenses that the corporation has are tax-deductible, and they have lower tax rates than S corporations in general. During tax season, C corps can provide employee benefits which also results in an overall reduction of taxation.
Access to More Capital
In case the owners of a C corp need additional capital for the growth of the business or if it’s going through a tough time, they always have the option to sell shares of stock. This allows them to get access to more capital which can make or break a business in a time of need.
Disadvantages of Forming a C Corp
In addition to considering the potential advantages that come with forming a C corp, you also need to be aware of some of its advantages. In this section of our article, we will look over some of the most impactful disadvantages of forming a C corp to help you make a better decision about whether this business structure is right for you.
C Corporations Are Double Taxed
One of the major disadvantages of forming a C corp is that it’s subject to double taxation. This type of taxation entails paying taxes on a corporate level and on a personal level through dividends. This is a deal breaker for some entrepreneurs, which is why many decide to opt for a business structure in which double taxation isn’t a requirement, such as sole proprietorships.
C Corporations Are Expensive to Start and Operate
Another thing to consider is that C corps are quite expensive to start and operate, especially when compared to less complex business structures. Its maintenance can be more expensive and time-consuming since it has higher ongoing fees compared to other businesses. In addition, you also have to consider that you’ll probably have to file articles of incorporation, which can be quite pricey.
Not to mention, owners of C corps sometimes have to hire attorneys and consultants to help with the workload, which can be quite costly.
More Rules and Regulations
Unsurprisingly, since C corps have a more complex structure and include more owners, they require its owners to follow stricter rules and regulations. Owners have to dedicate a lot of time and energy to ensure that they meet all the requirements from the state and that they’re keeping up with all the formalities and standards. Some of these include holding annual meetings (both for the shareholders and board of directors) and keeping records. Additionally, they also require more extensive and regular filings.
No Deduction of Corporate Losses
Unlike other types of corporations like S corporations, the shareholders of C corps are unable to deduct any expenses or losses on their individual tax returns.
C Corporation vs S Corporation
It can be hard to distinguish between S corps and C corps, especially if you’re trying to decide which type of corporation would be a better fit. Here’s what these distinct types have in common and how they differ.
What S corps and C corps share is the management structure – both types of corporations are comprised of a board of directors, shareholders/owners, and officers. The main difference is that S corps can have a limited number of shareholders – only up to 100 at a time – whereas C corps, as we established, don’t have a limit for the number of members/shareholders. Additionally, the members of S corps have to be U.S. citizens, whereas, with C corps, there are no restrictions in terms of where the members or business entities that have shares in the corporation come from.
A similar restriction of ownership is that S corps can’t be owned by other corporations, LLCs, or business entities, which can be quite restrictive for some businesses.
Another way in which C corps and S corps differ is through taxation. C corps pay double taxes, both on a corporate and on a personal level, whereas the members of S corps only pay taxes on a personal level.
There’s also a distinction in terms of how they’re formed – every corporation is considered a C corporation at the start, whereas if you want to change your corporation to an S corp, you’ll have to file Form 2553. Thus, forming a C corp is more straightforward and easier than forming an S corp.
In terms of stocks, S corps allow only one class of stock, whereas C corps are allowed to have various different classes of stock, making them a better fit for investors and conducting business outside the U.S.
How to Form a C Corp
Now that you’re aware of some of the most pressing advantages and disadvantages of forming a C corp, it’s time to go over some of the steps required to form this business structure.
Choose a Unique Business Name
The first step to forming any corporation is choosing a unique business name. Needless to say, your business name can’t be taken by another business entity, so make sure you do a trademark search to avoid any overlap.
Another aspect of choosing a name you should consider is that there are certain regulations you have to follow depending on which state you’ll conduct your business in. For instance, this might include avoiding certain restricted words which aren’t permitted by your state, so ensure that you do your research prior to choosing a name.
Select a Board of Directors
Another step to forming a C corp is appointing a board of directors who will handle the management and decision-making on behalf of the owners/shareholders.
File Articles of Incorporation
In order for your business to be incorporated, you’ll have to file articles of incorporation with the Secretary of State. The fees for filing articles of incorporation differ from state to state, but, generally speaking, prepare to spend a couple of hundreds of dollars during this stage.
Write Company Bylaws
In addition to filing articles of incorporation, you’ll also need to write the corporate bylaws for your C corp. These include general information regarding your business, such as the name of your business, its location, and a list of its members.
In the bylaws, you have to state important details about how your business will operate, including information about annual meetings, the obligations of each member, and the subsequent management of profits.
Issue Initial Stock
The next step of forming a C corp is to issue the initial stock for the shareholders and investors. Once the stock has been approved by the board of directors, you can distribute it to the initial shareholders of your C corp.
Apply for a Licence
If you’re conducting a business in a field such as medicine or law, you might need a special licence or permit in order for your business to operate. Make sure you do comprehensive research to find out whether you need to obtain one.
Get an EIN
Another important step is to apply for an EIN (Employee Identification Number). You can submit this application by emailing your application or over the telephone. Ensure that you follow the guidelines closely to avoid any mistakes.
Once all these steps are complete, you’ll be able to start working on your business!
Keep in mind that, since forming a C corp is quite a strenuous and complex process, you should consider hiring a consultant or a lawyer. By doing so, you’ll make this process that much smoother and less time-consuming than if you were to do it with your fellow members.
FAQs
Do I Need an Attorney to Incorporate?
A common question entrepreneurs have is whether hiring an attorney is crucial for incorporating your business. The answer is no – you don’t have to hire an attorney to complete some of the crucial steps of forming a C corp, such as filing articles of incorporation. You can do these steps by yourself, but keep in mind that it might be harder and more time-consuming to do them all by yourself, so hiring a consultant or an attorney can be incredibly helpful.
What Is an Example of a C Corporation?
In order to get a better idea of how C corps work, it might be helpful to see some examples of this business structure. Some of the most popular C corps include Apple, Starbucks, Amazon, and Microsoft.
Is a C Corporation Suitable for a Small Business?
Yes, C corps are a common business structure for small businesses whose members want to enjoy the benefits that come with owning a C corp, such as being more appealing to investors and having limited liability.
Is C Corp Better than S Corp?
Both C corps and S corps come with a set of pros and cons. The bottom line is that C corps are better for businesses who want to collaborate with partners outside the U.S. since they don’t have any restrictions in terms of foreign members.
Bottom Line
We hope you found our article on what is a C corp helpful in determining whether you and your business would be a good fit with this business structure.
One of the greatest advantages of forming a C corp is that all the members will get limited liability, so their personal assets won’t be up for grabs in case the business undergoes a lawsuit or a claim. Some other advantages include having easy ownership transfer, lower risk of audit, and access to more capital. In terms of disadvantages, the biggest one to consider is the double taxation, in addition to C corps being more costly to maintain and form.