By now, most likely you have read that we are living during a time called the “Great Resignation”. According to a recent survey by career site Monster, “95% of workers are currently considering changing jobs and 92% are willing to switch industries to land a new position.” Many people are leaping into entrepreneurship, starting their own business. In our business entity series, we explain each of the business structures, helping to identify which is the right fit for a new business. Today we’ll discuss a C Corporation. To access details on the other business entities, check out our blog.
What is a C Corporation?
Almost all corporations with more than 100 shareholders — and just about all publicly traded companies — are C Corporations. It is called a C Corporation since it is governed under Subchapter C of the Internal Revenue Code. Business that are looking to protect their personal assets from lawsuits or creditors might choose to incorporate as a C Corporation. This type of corporation also allows the company to pay tax at a special corporate tax rate vs. an individual tax rate. There can be anywhere from one member to multiple members. Many small businesses start as an LLC or S Corporation. Once they become profitable, they switch to a C Corporation to take advantage of the tax benefits and make the company attractive to venture capitalists. If a company becomes big enough to eventually go public, the business must be a C Corporation.
The Advantages of a C Corporation
- This entity establishes legal and financial separation between the shareholders and the business. The corporation can sue and be sued, not the shareholders.
- There is a fee to file articles of incorporation, but you do not need to file in the state where you live or are doing business.
- The C Corporation does not dissolve when owners leave the business, so the business can exist indefinitely.
- The C Corporation can raise capital easier than other business entity structures.
- The shareholders-employees can participate in the medical reimbursement plan and receive all medical reimbursements tax free, and the corporation can deduct the reimbursements up to a fixed dollar amount that is set by the corporation while owners of other entities may have to recognize the reimbursements as income
- Shareholders can accumulate earnings for future expansion at a lower cost than other business entities.
- Can have unlimited number of individual shareholders.
- Foreigners can own shares in a C Corporation.
The Disadvantages of a C Corporation
- There are more formalities, paperwork, and regulations required by Federal, State, and Local governments, such as the writing of bylaws, electing board of directors and maintaining formal board of directors’ meetings and minutes.
- Double taxation: Not only are profits taxed to the corporation, but the shareholders’ dividends are also taxed.
- You might need to hire an attorney to help complete the articles of incorporation since they must be legally correct to be valid.
- Specific steps must be followed (outlined below) for a C Corp to maintain its status.
- The owner of a C Corp must issue shares of stock. If there’s only one owner, then the owner will own 100 percent of the shares issued and outstanding.
- Even if there’s only one owner who owns 100% of the stock, the owner must write (and follow) bylaws that detail the rules and guidelines for operating the business.
The Steps Involved in Setting Up a C Corporation
These steps must be followed. Failure to comply with any of the steps could result in revocation of the C Corp status by the Internal Revenue Service.
- Talk to and hire a capable business attorney.
- Talk to and hire a capable accountant, especially with a C Corporation. The tax forms can be complicated.
- Select and obtain a corporation name that ends in “Corporation,” “Incorporated,” “Limited,” or an abbreviation of any of those words.
- File all other regulatory filings for the state you plan to do business in, including a Certificate of Incorporation with the Secretary of State’s office.
- Issue stock.
- Apply for a Federal Employer Identification Number (EIN) from the IRS.
- Appoint, at minimum, a director for your corporation, plus identify any officers.
- Write company bylaws.
- Hold directors’ meetings according to the schedule in the bylaws.
- Set up a business bank account.
- Procure the required insurances. Shareholders receive personal liability protection from the corporation, but to protect business assets, the corporation will need insurance coverage.
- Get professional bookkeeping support.
Tax Information for a C Corporation
The shareholders of a C Corporation will file Form 1120 at the Federal level. The tax deadline for C Corporations is April 15 for calendar year filers. For New York State, it is required to file a NY General Business Corporation Franchise Tax Return (NYS CT-3). If the business is registered in New York City, the company must also file the New York City Business Corporation Tax Return (NYC-2 or NYC-2S for the short form.) In addition, C Corps are required to issue annual forms for the dividends paid to shareholders (Form 1099-DIV).
If you have any questions about whether C Corp is the right structure for your business, or about the requirements, please contact us. As with all major decisions, it’s best to speak with your accountant prior to deciding which business structure is the best fit.