A C Corporation is a legal structure for a company that is authorized by the state to conduct business. Its owners, who are referred to as shareholders, are taxed separately from the business, and in most cases cannot be held personally responsible for business debt and legal issues. A C Corporation can have an unlimited number of owners, but not every C Corporation is a large company. Many small businesses incorporate and operate as C Corporations, which are known as general, for-profit corporations.
If you hear someone talking about a corporation, they’re most likely referring to a C Corporation, as it’s the most common type of this business entity and the standard legal structure under IRS rules. When a business incorporates, it automatically becomes a C Corporation unless it meets certain qualifications that enable the IRS to give it a special tax status, such as an S Corporation. You’ll read more about different types of corporations and how they’re taxed a little later in this article, but for now, let me tell you about some of the pros and cons of C Corporations.
Ready to Form a C Corporation?
CorpNet can provide professional assistance for registering your C Corporation. Our business filing experts are just a call or click away.
Advantages of Registering a C Corporation
As with any type of business structure, there are pros and cons that apply to C Corporations. They offer protection for shareholders by limiting liability but are subject to tougher government oversight than some other types of businesses. C Corps are generally attractive to investors, but they can involve some negative tax consequences for shareholders. Let’s have a closer look at some of the pros and cons so you can get a better idea of what a C Corporation entails.
Because a C Corporation operates as a separate and distinct legal entity, it provides limited liability protection for its shareholders, directors, officers, and employees. Generally, if a C Corporation is sued or incurs a lot of business debt, those legal obligations cannot become the personal responsibility of any person involved with the company, and all personal assets are protected.
There are, however, exceptions to that limited liability protection. An owner or owners of a corporation can be held personally liable if a court decides they’ve taken one or more of the following actions:
- Personally guaranteed a bank loan or business debt that the corporation could not pay
- Committed an intentionally fraudulent or illegal act that caused harm to the company or another person
- Directly caused injury to another person
- Failed to deposit taxes withheld from employees’ wages
Another instance in which shareholders can be held personally liable is if they’ve failed to treat the business as a separate entity by doing things like co-mingling personal and business funds, failing to issue stock to initial shareholders, not maintaining business records, or failing to adequately capitalize the company.
This can result in a court ruling that a corporation doesn’t actually exist, and the owner or owners should not be shielded from personal liability. This is known as “piercing the corporate veil,” and it puts shareholders in an extremely vulnerable position.
C Corporations are rightly perceived to be stable and long lived, which often results in increased credibility for a business. Having a formal corporate structure sends the message that the business is a professional endeavor that’s in it for the long term. That enhanced credibility can make it a lot easier for a company to find reliable suppliers, vendors, and investors.
Enhanced Financing and Investing Options
All companies require capital, which in business terms usually refers to cash that’s used for operational or investment purposes. If a business wants to purchase another building, it needs capital to do so. It also needs capital to keep its vehicles operating or machines running at capacity.
There are two main methods of raising capital. A company can borrow money from a lending institution, or, in the case of a C Corporation, it can sell shares of company stock. Because a C Corp can have an unlimited number of shareholders, it can sell as much stock as it wishes, although it will be required to register with the Securities and Exchange Commission if it reaches certain thresholds in terms of assets and shareholders. This ability to raise capital enables C Corporations to fund new projects that can set them up for growth and expansion.
Because a C Corporation is legally separate and distinct from its owners, it can continue on indefinitely, regardless of what happens to shareholders, director, or officers. Ownership interests of a C Corporation can be transferred by selling, bequeathing, or gifting shares of stock to others. That enables the business to continue operating through changes in ownership, management shifts, or other circumstances.
Disadvantages of Registering a C Corporation
C Corporations often get a bad rap because of the way they’re taxed. Any profits from the business are taxed at both the corporate and personal levels, a method that’s referred to as “double taxation.” The corporation first pays taxes on the profits, and then individual shareholders pay taxes on the dividend income they receive from the business.
There are, however, ways to avoid double taxation, and in many cases, a C Corporation pays taxes at a lower federal income tax rate than the individual income tax rates that apply to Sole Proprietorships and Partnerships. While double taxation can be an issue, there is a fair amount of tax flexibility available to C Corporations.
Paperwork and Compliance Requirements
C Corporations are required to adhere to certain legal requirements and regulations, such as establishing a board of directors, holding annual meetings, recording minutes, creating annual reports, and taking other steps to maintain corporate status. This can be cumbersome and may require hiring additional employees or outside help. Also, government oversight of C Corporations tends to be greater than with other business entities due to tax laws and other regulations.
Alternative Entity Types
C Corporations, as I mentioned earlier, are the most common form of corporate entity—but not the only one. In addition to C Corporations, there are Nonprofit Corporations, S Corporations, Professional Corporations, and Limited Liability Companies (LLCs) that are taxed as S Corporations.
There’s also a newer type of organization called a Benefit Corporation, or B Corp, which is a for-profit company created to generate social and public good while operating in a responsible and sustainable manner. Benefit Corporations, which include the global crowdfunding platform Kickstarter, outdoor apparel company Patagonia, and baby food producer Plum Organics, are gaining in popularity, but they’re not recognized in every state. For our purposes, we’ll just consider the four entities mentioned above.
C Corporation vs. Nonprofit Corporation
A Nonprofit Corporation is formed for charitable, educational, public safety, religious, literary, or scientific purposes, as opposed to the purpose of generating profits.
Nonprofit Corporations can include entities such as schools, charities, religious organizations, medical providers, sports organizations, community outreach groups, museums, legal aid societies, volunteer service organizations, and professional associations.
A Nonprofit Corporation provides the formalities and protections of a C Corporation, but once it’s granted 501 (c) (3) status from the IRS, it’s exempt from taxation. Also, none of the income generated by a Nonprofit Corporation can be distributed to directors or officers.
Once established, a nonprofit corporation must maintain compliance with the agency in its state that oversees and regulates charitable organizations.
C Corporation vs. S Corporation
An S Corporation is formed the same way as a C Corporation but elects to be taxed differently. Both C Corporations and S Corporations, in fact, get their names from the parts of the Internal Revenue Code they’re taxed under.
Instead of being taxed at both the corporate and personal levels, an S Corp chooses to be taxed as a pass-through entity. That means that corporate profits or losses are passed through and reported on the personal tax returns of shareholders, similar to a Sole Proprietorship or Partnership. This enables the S Corporation to avoid double taxation on corporate income.
Unlike C Corporations, S Corporations have limitations on ownership and must adhere to the following regulations:
- Have no more than 100 shareholders
- Each shareholder must be an individual or a trust, not another corporation
- Each shareholder must be a U.S. citizen or meet other residency requirements
C Corporation vs. Professional Corporation
A Professional Corporation, sometimes called a Professional Service Corporation, is a business entity employed by businesses that provide a professional service. Some examples include accountants, architects, attorneys, engineers, physicians, psychologists, social workers, and veterinarians.
Many states require professionals who want to incorporate their practices to create a Professional Corporation, and have special filing requirements for these businesses. A Professional Corporation can be taxed as either a C Corporation or an S Corporation.
While a Professional Corporation can shield a professional service provider from liability for the operations of the business and liability for the negligence or malpractice of an associate, it does not protect against liability for personal negligence or malpractice. A physician who is found guilty of malpractice still can be held personally responsible, but partners and associates cannot.
C Corporation vs. Limited Liability Company
A Limited Liability Company is easier and less expensive to get started and subject to fewer compliance regulations than a corporation, making it a popular choice for many small business owners. Like C Corporations, LLCs separate owners from the business, which limits personal liability.
Like a C Corp, an LLC also provides flexibility for how a business is taxed. An LLC can choose from two options:
- Pass-through tax treatment – The IRS will, by default, tax an LLC the same way it taxes a Sole Proprietorship or a Partnership, which is as a disregarded entity. That means all income, profit, and loss pass through to the owner or owners’ personal income tax return and are not subject to corporate taxes.
- S Corporation tax treatment – If the owner or owners of an LLC elect to be taxed as an S Corporation, business income and losses still flow through to their personal tax returns. A difference, however, is that owners will only pay self-employment taxes (Social Security and Medicare) on their owner’s wages and salaries, not on all income generated by the business.
Unlike C Corporations, an LLC cannot issue company stock, making it more difficult to raise capital. Also, some investors consider LLCs as less reliable investments than corporations.
How to Register a C Corporation
The requirements for registering a C Corporation vary from state to state, but there are some steps that apply in most cases for businesses wishing to incorporate. The process for incorporating as a C Corporation is outlined below but always check with the state in which you’re registering your business for any specific requirements.
Eleven steps to take when registering your business as a C Corporation:
- Choose a business name – The name you choose for your C Corporation will affect numerous aspects of your business, including website domain, logo, potential copyrights and trademarks, overall branding, and others, so think carefully before choosing. You can make sure the name you select hasn’t already been claimed in your state by using CorpNet’s corporate name search. Be aware that a corporation’s name typically must include words or abbreviations like Incorporated, Corp., Inc., or Corporation.
- Appoint a Board of Directors – The Board of Directors is a group of individuals who will collectively oversee the activities of the C Corporation and represent its shareholders.
- File Articles of Incorporation with the state – Your business cannot be officially recognized as a C Corporation until you file Articles of Incorporation, sometimes called a Certificate of Incorporation. Again, fees and requirements vary from state to state.
- Obtain an Employee Identification Number from the IRS – Also called a Tax ID Number or Federal ID Number, an EIN is to a business what a Social Security number is to an individual. Your C Corporation will use its EIN for tax filing and reporting purposes, and most banks will require a corporation to have an EIN before allowing it to open a business bank account.
- Draft bylaws – Corporate bylaws provide a roadmap for operating the company and help keep everyone on the same page regarding procedure and responsibility. You’ll want to take time to craft bylaws that are clear and concise. Bylaws should include the purpose of the business; procedures and rules for selecting officers, voting, issuing stock, and recordkeeping; dates for annual meetings; names of officers and directors; basic information like addresses and phone numbers; and other information.
- Hold an initial meeting of the Board of Directors – At this important meeting, you’ll cover topics necessary for getting the company started. These include appointing officers, adopting bylaws, authorizing the issuance of stock, choosing a bank, choosing a fiscal year, and other tasks. Corporate minutes must be recorded, approved by all directors, and kept on record.
- Open a corporate bank account – This is a necessary step to ensure the C Corporation can pay vendors, accept payments from customers, and conduct other financial transactions.
- Obtain business licenses and permits to ensure legal operation – Depending on the type of business, a C Corporation might require licenses from federal, state, county, and municipal governments to assure legal compliance. You can consult your state’s website to find out what you’ll need, or contact CorpNet for assistance in determining the specific licenses and permits required.
- Submit an Initial Report – There are five states: (Alaska, California, Georgia, Missouri, and New Mexico) that require C Corporations to file an Initial Report, also called a Statement of Information. The report includes basic information such as business name, address, type of activity to be conducted, names and addresses of officers and directors, and the name of a registered agent.
- Issue stock to shareholders – Stock is issued to each initial shareholder and serves as evidence of the individual’s ownership in the C Corporation. The names and addresses of all shareholders must be recorded, and the corporation must comply with all securities laws of the state.
- Register for payroll taxes – If your business is planning on hiring employees, you will need to register for payroll taxes. Payroll taxes are a legal requirement for hiring and paying employees in the United States. All small businesses must track and report all payroll taxes to avoid government audits and fines.
Ready to Form a C Corporation?
CorpNet can provide professional assistance for registering your C Corporation. Our business filing experts are just a call or click away.
Frequently Asked Questions
You’ve read a lot about C Corporations, and you probably have some questions you’re wondering about. Here are some quick answers to some frequently asked questions.
Do I need a lawyer to form a C Corporation?
There is no requirement that you hire a lawyer to help you form a C Corporation. Many states provide guides to help you file the necessary paperwork and form your business, or you can work with an online business filing company like CorpNet to walk you through the process.
It’s often helpful to consult an attorney who can help you decide which business entity type is right for your business before you incorporate, as your particular business may benefit from forming as something other than a C Corporation. For instance, you might decide you’d be better off forming an S Corporation to avoid the double taxation of a C Corporation, despite the restrictions regarding ownership that apply to an S Corporation.
While many entrepreneurs have successfully incorporated businesses on their own, be aware that the process can be time consuming and confusing for some. If you choose to forego the services of a lawyer or a business filing company, give yourself adequate time and make sure you understand all the instructions and requirements pertaining to the registration.
Is there a preferred state for registering a C Corporation?
Where to incorporate a business is certainly a concern for entrepreneurs, and it’s an important issue to consider. Every state has its own business laws and tax codes, both of which can affect a business’s bottom line. Where to register a C Corporation is a complex question, so I urge you to do some research and get the facts before you decide.
Watch our webinar to learn more: How to Choose the Best State to Incorporate a Business
In most cases, it makes the most sense for an entrepreneur who is planning to live and operate a business in their home state to incorporate the business there. It’s simpler because you’ll only have to deal with the filing and reporting regulations, fees, and tax requirements of one state instead of several, and incorporating in your home state can enhance your local reputation and foster a sense of community.
If for some reason you don’t want to incorporate in the state where you live, you’ll need to consider a few important factors when choosing a corporate domicile, or home state, for your business. These include Nexus (how a business is connected to a state), formation fees, annual filing fees, franchise tax, state corporate tax, privacy, and the business-friendly climate of the state.
Fortunately, there are organizations that conduct studies and consider multiple factors to determine the best and worst states for startups. WalletHub, a personal finance company based in Miami, releases a report each year on the Best and Worst States to Start a Business, and it’s worth a look.
Can a C Corporation operate in multiple states?
Yes, a C Corporation can operate in more than one state, but there are filing requirements and tax considerations you’ll need to consider. Requirements vary from state to state, making it important to fully understand what’s involved before deciding to expand your business across state lines.
While you probably won’t be required to form a new business entity in every state in which you want to operate, it’s likely you’ll need to file for foreign qualification, which is the process of registering a company to conduct business there. Foreign qualification can be a complex process and you’re likely to encounter additional filing fees as you’ll be required to file separate filing documents. I’d recommend that you consult an attorney, tax advisor, or accountant for professional advice.
How much does it cost?
The cost to form a C Corporation varies from state to state, with filing fees generally falling between $50 and $500. You may also encounter legal fees for document drafting and review and license fees. While forming a C Corporation involves more legal paperwork than other business structures, the benefits of personal liability protection, growth potential, tax flexibility, and other advantages afforded by a C Corporation normally make the filing fees worthwhile. Businesses can keep the costs of incorporating and maintaining compliance affordable by asking CorpNet to manage the necessary paperwork.
Can a C Corporation have a single owner?
Yes, a C Corporation with a single owner—often called an individually owned C Corporation—is legal in every state. Essentially, the owner is also the majority shareholder, can serve as the lone director of the board, and holds the officer positions of CEO, CFO/treasurer, and secretary.
Bear in mind that an individually owned C Corporation is held to the same standards as a multi-member organization in terms of registering the business and complying with ongoing regulations and requirements. The owner must follow the same tax laws as a large corporation and make sure to keep all personal and business finances separate.
Can I convert an LLC or Sole Proprietorship to a C Corporation?
Yes, you can convert an LLC or Sole Proprietorship to a C Corporation. Regulations for doing so vary from state to state, however, so you’ll need to take some time and find out what’s required to do so.
Generally, there are three ways to convert your business from an LLC to a C Corporation:
- Statutory conversion – This is a streamlined, relatively inexpensive process that converts the LLC into a C Corporation, establishes LLC members as corporate stockholders, and transfers the assets and liabilities of the LLC to the C Corporation. This method isn’t available in every state, though, so you’ll need to check the regulations where you live.
- Statutory merger – A merger would create a C Corporation that absorbs the LLC, leaving the C Corporation as a new business. After you file a certificate of merger with the appropriate agency in your state—usually the Secretary of State—the interests of the LLC members are converted to stock in the new company.
- Non-statutory conversion – This is a more complicated process that removes all interests, assets, and liabilities from LLC members and formally turns them over to the new C Corporation, with all members required to formally agree to the conversion. I wouldn’t recommend that you attempt to convert your LLC in this manner without the help of a lawyer or business filing company.
To convert a Sole Proprietorship to a C Corporation, you’ll need to register as a C Corporation by filing Articles of Incorporation with the state in which you’ll operate your business. Then you must transfer assets from the Sole Proprietorship to the Corporation in exchange for corporate shares. Again, the process can be complicated and may require assistance from an attorney or business filing company.
What tax rate does a C Corporation pay?
A C Corporation’s profits are taxed at a flat corporate income tax rate of 21%. That rate was established by the 2017 Tax Cuts and Jobs Act (TCJA), which substantially lowered taxes for many businesses. Remember though, that individual shareholders will also have to pay taxes on any dividend income they receive from the business. That tax rate ranges from 10% to 37%, depending on income.
When are taxes due?
When a C Corporation pays its taxes depends on whether it follows a calendar year or fiscal year. As you probably know, a fiscal year is a one-year accounting period used by some businesses, nonprofit organizations, and governments that ends on a date other than December 31.
A business that uses a calendar year must pay its taxes by the 15th day of the 4th month after the close of the tax year, normally April 15. If that day falls on a weekend or holiday, taxes are due on the first, following business day.
If a C Corporation elects to use a fiscal year, it must pay its taxes by the 15th day of the 4th month after the end of the fiscal year. If a company’s fiscal year ends on June 30th, for instance, its taxes would be due on October 15.
A C Corporation that cannot meet its initial tax deadline can file for a six-month extension using IRS Form 7004. So, in 2024, a business that uses a calendar year accounting system would have to submit its taxes by October 15, and one that uses a fiscal year by the 15th of month six months after its normal filing deadline.
How do owners of C Corporations get paid?
Owners of C Corporation can get paid through compensation for services performed as employees, or through distributions they receive as shareholders. Compensation rates are determined by a set of rules issued by the IRS. There are pros and cons to both payment methods and understanding the tax implications can be tricky, meaning it’s a good idea to consult a tax attorney for advice if you’re trying to answer this question on your own.
Briefly, owners who take compensation are subject to payroll taxes at the corporate and individual levels, but there is no payroll tax for owners who take a dividend instead of compensation.
Because a C Corporation is a tax-paying entity, however, how owners are paid also affects the business. A C Corp can deduct employee salaries and bonuses, along with the payroll taxes on them. Dividends, however, are not tax deductible for the business. The information I’ve provided here is only the tip of the iceberg as to how owners get paid, and again, I recommend seeking the help of a professional when trying to decide.
What kind of ongoing compliance is required?
While C Corporations offer many advantages in liability protection, growth opportunities, and potential tax benefits, they face more compliance requirements than Sole Proprietorships, Partnerships, and LLCs.
If you decide to form a C Corporation, you’ll be required to take steps to stay in compliance and remain in good standing with the state. Some common requirements include the following:
- Establish regular meetings of the corporation’s board and directors
- Hold at least one shareholders meeting each year
- Record meeting minutes and make them available to shareholders
- Maintain a list of owners’ names and ownership percentages
- File annual reports
Furthermore, C Corporations must file financial disclosure reports and financial statements to prove there is no comingling of personal and corporate assets, and must keep company bylaws available at the primary location of the business.
A Final Thought on C Corporations
As you can see, there’s a whole lot to consider if you’re contemplating, getting ready to form, or running a C Corporation. While some entrepreneurs get a C Corporation up and running on their own, most people benefit from professional help that can guide you over potential hurdles and ensure successful registration, operation, and compliance for your C Corp.