Is Forming a C Corporation Right for My Business?
Is Forming a C Corporation Right for My Business?
If you are starting a business, there are several different types you can set up, such as a limited liability company or partnership, a sole proprietorship, a C corporation, or an S corporation.
Choosing a C corporation is not for everyone, but it has some distinct advantages that other corporation types don't have. Is a C corp right for your business? That depends on the business, what your financial advisors or lawyers suggest, and in which direction you wish to take your company.
What is the Definition of a C Corporation?
A C corporation definition involves several elements. It is a corporate entity that can issue stock to the shareholders, who avoid personal liability for the corporation. There is no limit to the number of shareholders it can have, and you can be the only shareholder if you desire.
The corporation must, however, issue shares of stock or your company will not be recognized as a C corporation. You can take the company public and issue stock options.
The corporation also must have a board of directors and officers; although, again, it is possible for you to be the only officer and director.
Because a Subchapter C corporation—which stands for Subchapter C of the Internal Revenue Code—allows for unlimited growth to the company, a C corporation could attract investors, which can help the company grow.
Forming a C Corporation
There are several requirements to form a C corporation.
Some lawyers advise registering the C corporation in the state in which you are located. Others advise registering it in Delaware, which has long been known to have tax breaks for corporations registered there, as well as a court system that tends to favor businesses. Nevada is trying to rival Delaware and attract C corporations by providing significant breaks for C corporation taxes. Check with your financial or legal advisor before choosing where to file.
The steps involved in forming a C corporation vary in each state, but generally the following is required:
- Choose a name for your C corporation. If the state in which you file allows you to reserve names, you may be encouraged to file up to three different names for the corporation. The Secretary of State will pick one in the order you suggest if the name is available and is not trademarked. You should add either Inc., Corp., or Ltd. at the end of the name. Appoint directors of the corporation or name yourself as the sole director.
- File articles of incorporation with the Secretary of State in the state where the corporation will be filed. You may want to have an attorney do this for you or use an online service to have the articles of incorporation prepared. Specify C corporation forms so that you're filing the correct forms.
- Write the company's bylaws. Every corporation must have bylaws to be considered a corporation. The bylaws are the blueprint for operation of the corporation and for detailing when, where, and how the officers meet, the responsibilities of the members, and the corporation's purpose.
- Issue stock, after the articles of incorporation have been accepted for filing. This step is absolutely required to retain the status of a corporation.
- Apply for any business licenses that may be needed.
- File for a tax ID or EIN, which can be done online.
- Apply for any other IDs that may be needed. Check with an attorney.
- Hold the first directors' meeting and keep a copy of the minutes. Hold directors' meetings on a regular basis.
Advantages of Creating a C Corporation
C corporation advantages are as follows:
- Limited liability, where the owners, who are the shareholders, are not personally liable.
- Numerous tax deductions. Check with your financial advisor or an attorney to find out how this applies in your case based on where you are filing.
- Ability to survive loss of the corporate owners.
- Ability to attract investors.
- Potential for unlimited growth and ability to take the company public. Once the corporation has issued a certain amount of stock, it will be required to file with the SEC pursuant to the Securities Exchange Act. Check with your financial advisor.
Disadvantages of Creating a C Corporation
C corporation disadvantages are as follows:
- Double taxation, where the corporation pays taxes, as do the shareholders on the dividends they receive.
- Difficult to set up and operate as a C corporation. You will need outside assistance from a financial and/or legal advisor to set up your business as a C corp.
- More expensive to set up and maintain than other entities.
- More government intervention than other entities, to ensure that regulations are being followed.
- No deduction of corporate losses when filing personal taxes.
You have to decide whether the advantages outweigh the disadvantages for your business. Consult an attorney or financial advisor to help you decide what is best for your company and to get help in setting up your C corp.
If you're ready to start a C corporation, LegalZoom can help. Answer a few questions about your business to get started. We'll assemble your documents and file them directly with the Secretary of State and you'll receive your completed corporation package by mail.