You want to form the right business entity for your business, right?
When you start a business, a C Corporation is one of the popular business entities you can choose from. There is no restriction as to who is allowed to form a C Corporation. There is no age (some states do require directors of a corporation over 18), residency or other legal requirements.
In considering how to form a C Corporation, it is essential to know the difference between an LLC and a C Corporation.
While an LLC and a C Corporation are both business structures that offer liability protections to company owners, they are differentiated in several essential ways.
C Corporations make up the majority of the corporations within the U.S. and are the framework for smaller companies as well. C Corporations are typically formed by filing for incorporation at the state level jurisdictions.
To become a C Corporation, the business must have management and a board of directors and file required documents on an annual basis.
Businesses are taxed twice as C Corporations, once for corporation revenue and once for what income passes through to C Corporation members (shareholders).
It is important for you to have an understanding of how to form a C Corporation. A C Corporation is a corporation that decides to be subject to Subchapter C of Chapter 1 of the Internal Revenue Code of the IRS. Formation typically requires the process of a state filing, obtaining a Federal Tax ID, and the election of management (consisting of: a president, treasurer, and secretary as the minimum number of offices, with at least 2 people occupying them).
The state filing includes the following information:
- Articles of Incorporation – This document provides the state with the necessary information about your business. Included in the articles of incorporation are: corporate name, business purpose, registered agent, incorporator, number of shares, share par value, preferred shares, directors, officers, and the legal address of the business.
- Corporate bylaws – Your corporate bylaws are specific to your business. Here are the basic components of corporate bylaws: business name, purpose and location, members, the board of directors, committees, officers, meetings, conflicting interest, amending bylaws.
- Written consent of incorporator
- Resolutions of the first meeting of the board of directors
Once a C Corporation filing is complete, the incorporator will receive a Certificate of Incorporation. The incorporator is required to file relevant reports in a timely manner and keep relevant documents in a safe place.
This system of record-keeping makes the C Corporation more vulnerable to have their “corporate veil pierced.” However, while the C Corporation is more vulnerable, they do possess tax benefits. An LLC is much more difficult to pierce than a C Corporation because it has fewer requirements to keep information accessible to the public. So long as LLC members do not commingle funds, the likelihood of their limited liability protection being pierced is highly unlikely.
Another important aspect of how to form a C Corporation is the concept of taxation. Even though employee Medicare, FICA taxes, and state taxes are not affected by a company’s corporate structure, federal income tax treatments may be different for LLCs and C Corporations.
In this system, the corporate tax rate is typically lower than the personal income tax rate. That being said, in the case of C Corporations, there is double taxation due to (1) the corporation being taxed on profits and (2) these profits are taxed again when distributed to shareholders (owners), when the owners are taxed on dividends. Since a C Corporation is considered a separate entity from its owners (shareholders), which permits the double taxation provision.
While a C Corporation does not have any choice in terms of federal income tax treatment, an LLC, which is not classified as a corporation and is not considered to be a separate legal entity from its owners can elect to be taxed as either an S corporation or a C corporation. Furthermore, C Corporations carry over losses forward to balance themselves out against future company profits.
C Corporations gain a considerably favorable tax rate from reinvesting their profits into the corporation. This measure is an effective strategy that greatly reduces tax burdens for C Corporations because they are enabled to use profits from any corporate-related revenue source as reinvestment credits against excessive taxation. This process enables corporations to use offshore profits under repatriation laws to essentially reduce their U.S. tax burdens by 70%-90% or more.
Common questions about forming a C Corporation:
- Do I need an attorney to form a C Corporation? – You don’t really need an attorney. You can use one of the many services helping entrepreneurs form C Corporations such as Corpnet.
- What are the C Corporation advantages? – Limited liability protection, unlimited number of shareholders, easy transfer of ownership (great if you plan on selling your business), the ability to raise capital, tax-deductible expenses.
- What paperwork required? – They must be prepared and files with the proper state authorities. You are also required to pay applicable filing fees and franchise taxes.
- What should I name my corporation? – It is important to choose the name of your corporation carefully. Your corporation’s name should create the appropriate image of your brand. It is also important that your name is unique. Avoid using a name that is deceptively similar to the name of an existing business.
- What is double taxation? – C Corporations’ profits are taxed at the business and individual levels. Business profits are taxed at first. Then, profits distributed as dividends to shareholders. Shareholders are required to pay taxes on the individual level.
- What is the C Corporation’s business structure? – There are three groups. Shareholders are the owners of the corporation. The directors are managing the affairs of the C Corporation. Finally, officers are responsible for the management of the corporation.
- Where should I incorporate my business? – You are not required to form a C Corporation in your home state. There are several states that are attractive to C Corporation filings. Nevada has low tax filing fees. Delaware is popular because it has business-friendly laws and statutes. Entrepreneurs like to incorporate in low or no income tax states.
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