What Is a C Corporation?

A C Corporation (or C Corp) is a type of corporation, or legal entity, that offers the most legal and tax protection to its owners. It is the most common type of corporation in the United States and provides a level of liability protection that other business entities do not. By forming a C Corp, business owners are able to establish their social and legal status as a separate entity and protect their personal assets from any liability that may arise in running the business.

Understanding How a C Corporation Works

Before you consider forming a C Corporation, it is important to gain a basic understanding of how the type of business entity works. The most important thing to understand about the C Corporation is that it is a distinct legal entity from its owners. Owners of a C Corporation are referred to as shareholders, who receive shares of stock in exchange for the contributions made to the company. The ownership, or equity, of the company is divided among the shareholders, who then receive periodic dividends from the company’s profits.

Aside from shareholder dividends, a C Corporation is also responsible for paying taxes on its net income. C Corporations are subject to two levels of taxation, including federal and state corporate taxes, as well as potential personal income tax on any dividends distributed to the shareholders. It is important to note that even if a C Corporation has some losses, it may still be required to pay taxes on its income.

The Benefits of Forming a C Corporation

Before you decide to incorporate your business, it is important to weigh the pros and cons of forming a C Corporation. One of the major benefits of forming a C Corporation is the limited liability protection it offers to its owners. As a separate legal entity, a C Corporation has the ability to protect its owners from any personal liabilities that may arise from running the business. In addition, a C Corporation is eligible for more tax benefits than other business entities. C Corporations are taxed on the corporate level and are permitted to deduct business expenses from taxable income.

The Drawbacks of Forming a C Corporation

Although there are many benefits of forming a C Corporation, it is important to be aware of some of the drawbacks that come along with the entity as well. One of the main drawbacks is the double taxation of corporate income. Because C Corporations are taxed on the corporate level and shareholders are responsible for any dividends that are distributed, C Corporations are subject to, what is referred to as, double taxation. This means that any profits the corporation makes are taxed first at the corporate level and then again when dividends are paid to shareholders.

In addition, forming and maintaining a C Corporation is complex and costly. While other business entities can usually be established relatively quickly and inexpensively, incorporating a C Corporation requires legal documents and filings, as well as state and federal taxes. This can be a time-consuming and expensive process.

Forming a C Corporation: A Step-by-Step Guide

If you have decided that forming a C Corporation is the right choice for your business, then the following is a step-by-step guide to help you get started.

1. Choose a Name:
   In order to incorporate a C Corporation you will need to choose a unique business name. Make sure to check availability with the state to make sure it is not already in use.

2. File Articles of Incorporation:
   Once you have chosen a name for your C Corporation, you will need to file the articles of incorporation with the state. This document provides the state with the basic information about your company, such as name, address and business purpose.

3. Appoint Directors:
   A board of directors must be appointed to manage the business. The articles of incorporation require the company to have at least one director and indicate who is responsible for the day-to-day operations.

4. Hold an Organizational Meeting:
   An organizational meeting should be held to discuss the direction of the company, elect officers and write the corporate bylaws. The bylaws include important information about the company, such as how the company will be governed, and how the shares of stock will be distributed.

5. Apply for an Employer Identification Number:
   Once the articles of incorporation have been filed, you will need to apply for an employer identification number (EIN). This number is used to identify the C Corporation and is required to open a bank account and file taxes.

6. Open a Bank Account:
   Once you have an EIN, you can then open a business bank account. This will be used to deposit and withdraw business income and manage any expenses.

7. Obtain Necessary Licenses and Permits:
   Depending on the type of business you are operating, you may need to obtain licenses or permits. It is important to research this before you start operating the business.

8. File Taxes:
   C Corporations are required to file taxes each year and pay any taxes that may be due.

Forming a C Corporation can be a great way to protect your personal assets, manage taxation and create a profitable business. However, it is important to understand the process and consider the pros and cons of forming a C Corporation before you decide to incorporate. Once you understand the process, you can then follow the step-by-step guide outlined in this article to get started.