Incorporation 101: What Is C-Corporation?

What Is a Corporation?

Corporation is a legal form of organization of persons and material resources, chartered by the state, for the purpose of conducting business. Corporation is owned by shareholders, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Corporation must adhere to corporate tax laws and file corporate taxes regularly.

A Corporation, also referred to as Standard Corporation, C-Corporation, or Regular Corporation, may have an unlimited number of shareholders, including foreign citizens, may be public (when shares are offered for sale to the public) or privately held (when shares are not sold to the public). Usually shares of the corporation are held by the founders, board members and private investors, such as venture capitalists, who may or may not sit on the board of directors.

C-Corporation is the most common type of incorporation. C-Corporation is considered to be a for-profit, state-incorporated business. Registration is done with state authorities and must abide by corporate laws in the state where it is incorporated.

Corporation provides protection to its shareholders from the corporation’s liabilities, thus the term “limited liability”. However, C-Corporations also have what is called “double taxation” – first the corporation is taxed on its profits, and then shareholders are taxed on the distributions they receive, such as profit sharing payments or dividends.
To incorporate you will need to register your business name, file a certificate of incorporation or articles of incorporation, and pay a fee. You will also need to draft corporate bylaws and hold a board of director’s meeting.

Why Should I Incorporate?

Incorporating is one of the best ways to protect your personal assets while doing business. Most people choose to incorporate solely for this reason, but its not the only advantage of incorporation.

For example, owning a corporation can save you tax money, allows for a greater business flexibility, reduces your chances to be audited, provides tools for better itemization, and makes raising capital less complicated.

Advantages of Incorporating

  • Limited Liability: A corporation is a legal entity that exists separately from its owners or shareholders. With some exceptions, shareholders are not liable for the debts and obligations of the corporation or from any litigation where the corporation is the defendant. Some form of insurance may still be necessary, but incorporation contributes an added layer of protection (also called “corporate veil”).
  • Tax Savings: Careful planning of your business expenses can result in lower overall tax rates. There are many tax benefits for doing business under incorporation, depending on your business income. Even if your young business becomes quite profitable soon, a corporation is entitled to many deductions otherwise not available to you, resulting in significant tax savings. An example of such tax-deductible expense would be salaries of your employees and yourself.
  • Reduces Likelihood of IRS Examination (Audit): Non-incorporated businesses, particularly of higher gross income levels, are targets of many IRS Audits. Incorporated businesses have a much lower audit rate, even if they have high income levels.
  • Anonymity: Depending on the state where you choose to incorporate in, a corporation can be established in such a way that shareholders/owners remain anonymous. Often same level of anonymity can be provided for officers and directors.
  • Added Credibility: A corporate structure communicates permanence and credibility. Even if its a company with only one stockholder and employee.
  • Easier Access to Capital Funding: With a corporation it is much easier to attract investors through the sale of stock.
  • Easier Transfer of Ownership: Ownership of a corporation may be transferred without substantial disruption of operations through the sale of stock. This way the need for complex legal documentation is reduced.
  • Flexibility of Share Ownership: Owning shares gives you the flexibility needed, among other things, to effectively capitalize your business, or to retain key employees. To further capitalize the business successful C-Corporation can be taken public in a process called Initial Public Offering (IPO). You can also issue stock or stock options to your key employees, “binding” them to the business and thus retaining them (common in hi-tech industry among others).
  • Longevity: The board carries on the corporation, not the owner. That means that a corporation formation can last longer than an owner-based company such as an LLC.

Main Disadvantages of C-Corp.

C-Corporations have certain disadvantages. The main disadvantage is the fact that the profit of a C-Corporation is taxed to the corporation when earned, and the corporation does not get a tax deduction when it distributes dividends to shareholders. Then when dividends are distributed to the shareholders they are taxed again at the shareholder level. This phenomenon is called “double taxation”.

Similarly, when C-Corporation has a loss, its shareholders cannot deduct it from their personal income.

C-Corp. vs. S-Corp. vs. LLC

Other forms of incorporation of business organization include S-Corporation and LLC. Each of those types of entities have certain advantages and disadvantages when compared to the common C-Corporation, but a more detailed comparison between those entities goes beyond the scope of this article.

Alex Zehnbacht is an entrepreneur with over 8 years of experience in start-ups and business consulting and one of the founders of MyUSACorporation.com, an online business dedicated to help entrepreneurs with all their business filing needs. He has helped thousands of clients to incorporate their businesses, form LLC, obtain various business licenses, and much more.

Different Types of Corporations

In the antithesis of economics, the assimilation can not alone be a benign decision, it can aswell be the demise. Assertive aspects should be taken into application afore even starting the process, including which administration to go. As the buyer of a aggregation you charge to be accommodating to yield alive risks to abide your movement forward.

Let’s analyze the 5 basal types of corporations. On each, we will altercate their pros and cons. What accountability risks anniversary blazon offer, and breadth you abatement in commendations to taxes on each.

S Corporation

In the absolute basal of terms, an S Affiliation is a aggregation that has absitively to use Sub-chapter S of the IRS Code as proposed in Chapter 1. This agency the affiliation does not pay assets taxes. They in about-face bisect all accumulation and losses a part of their shareholders who in about-face accept to address it on their assets taxes.

From the angle point of taxes, you anon absolute the bulk of taxation your aggregation will receive. Unless you aswell allocate yourself as a C Corporation, bond both of these puts you into a bifold taxation bracket that will become cher for all parties involved. This is abundantly due to your profits getting burdened and again your shareholders profits getting burdened as well.

If an S Affiliation has employees, as adjoin to absolute contractors, they are appropriate to still pay FICA taxes on the employee’s payroll. The agent accept to still pay all appropriate State, County and Federal taxes as appropriate by law.

Since the S Affiliation does not accept to pay taxes on its profits, the accountability charcoal on the shareholders of the company. The better allocation of which is the buyer or co-owners of the company. So if you own 50% of the accessible shares, you will be appropriate to pay 50% of the accumulation or accident tax on your aggregation for the year.

Here are some key factors you accept to accumulate in apperception if you are allotment to become an S Corporation:

You accept to be acceptable to affirmation S Affiliation Status. Which agency you accept to be a calm affiliation or be a registered LLC. Alone one banal chic is allowed. The best bulk of shareholders your aggregation can accept is 100. (Spouses can be claimed as a alone shareholder, as can absolute ancestors associates that are descended from a accepted ancestor. They in about-face accept to accede to this allocation however.) All shareholders accept to be U.S. Residents and accept to be accustomed people. You cannot accept shares to corporations or added companies, with a few accessory exceptions. Such as a 501(c) (3) corporation. Every accumulation or accident should be activated appropriately to anniversary shareholder. For example, if you accomplish a $500 profit, a being with 25% absorption in the aggregation would accept $125.00.

Outside of the tax allowances you should aswell abide acquainted of the accountability that an S Affiliation carries. Although it is classified as a aggregation breadth Shareholders accept bound acknowledged liability, it doesn’t beggarly it is absolutely chargeless from acknowledged liability.

They are still amenable for the aggregation based on their allotment allotment in the afterward circumstances, and accept the abeyant to accept their accident beat if the afterward are found:

A Cloister determines the aggregation is fraudulent. Accumulated formalities accept been neglected. Starting basal accept to accept been abundant for antecedent success. Claimed assets accept been added to awning expenses.

All officers, employees, agents and admiral of the aggregation are advice alone amenable in the contest that any accountability arises as a aftereffect of their services. However, assertive individuals in those categorizes can get indemnified for a cost. It will about alone awning costs and costs that appear from assertive tasks. It does not abolish acknowledged responsibility.

Additionally, the aggregation as accomplished can be adequate from one person’s mistakes through allowance several companies activity in commendations to liability. Any aggregation ambidextrous with abeyant absolute abrasion should annals for insurance.

C Corporation

Next, we will attending at C Corporations. In absolute basal terms, A C Affiliation is a aggregation that is appointed to be burdened beneath Sub-chapter C of the IRS Code. A majority of companies act as C Corporations. If you absence the minimum requirements of an S Affiliation by one qualification, it is about breadth your aggregation fits best.

The basal aberration amid the C Affiliation and the S Affiliation is the bulk of individuals accustomed to “own” the company. Meaning you can accept added than 100 shareholders.

Additionally, added corporations can own shares in the C Corporation, as able-bodied as adopted and calm shareholders. This is advised a accepted actor account. But clashing an S Corporation, the C Affiliation is burdened on its profits. In about-face the Shareholders are burdened on their balance afterwards that.

However, afore a C Affiliation can be formed, the afterward accomplish accept to be done: A Affiliation Name accept to be accustomed based on Accompaniment Rules. All Director Positions accept to be abounding in advance. The Articles of Affiliation accept to be completed with the fees posted. An accustomed accumulated bylaw accept to be completed with a plan to follow. One antecedent affair accept to accept occurred with the lath of directors. Banal Certificates accept to accept been issued for the antecedent owners. License and Permits accept to be acquired and approved. You accept to accumulate annal of anniversary letters and diplomacy on book at all times.

Liabilities for a C Affiliation are agnate to the S Corporation.

Limited Accountability Aggregation (LLC)

In the a lot of basal of concepts, this is a aggregation is a affiliation aggregation with accumulated elements attenuated in. This blazon gives little accountability to the absolute owners of the company. In absoluteness it is aswell not an absolute Corporation, rather it is an unincorporated association. While you are adequate from a lot of liabilities that arise, any counterfeit or misrepresentations are not adequate as bent by a cloister of law. This aswell agency any alone ambuscade abaft an adapt ego.

Most LLC can accomplish with the tax rules of either an S Affiliation or a C Affiliation depending on how the owner(s) adopt to accept their assets handled. Ideally administration it as an S Affiliation provides the best band-aid for a lot of individuals because a LLC if it to taxes. So a account is the pass-through taxation available.

The accountability on a LLC is a little stricter than those of the corporations as well. While claimed acreage cannot be bedeviled for abortion of the business to pay, the bound accountability is alone from a cyberbanking angle point. The afterward items are your better apropos of liability. The aggregation after-effects in absolute abuse of any individual. You alone agreement a accommodation for the company. Taxes for advisers are not paid that you accept withheld. Any actionable or counterfeit activity. Using the LLC as an addendum of your claimed affairs.

Sole Proprietor

This is the a lot of simple of business structures. A sole cartel is an alone that is the business entity. This agency there is no acknowledged acumen amid the alone and the company. Any accumulation or accident of the aggregation is the tax albatross of that individual, and they are amenable for all acknowledged instances that appear as a aftereffect of their business.

A account to these types of business is they are absolute simple to alpha up. There are basal regulations, and the buyer has added of a say in how the aggregation is run. However, it can be a cyberbanking accountability for anyone attempting to run the company.

Most banks tend to shy abroad from loaning to sole proprietors, as they don’t tend to be as acknowledged as above corporations. Since the buyer has the cyberbanking abetment for the aggregation they are accurately amenable for all cyberbanking loans associated with the business.

Limited Accountability Affiliation (LLP)

Simply put this is a affiliation breadth anniversary of the ally has a bound albatross in the company. Depending on what Accompaniment you are aperture one of these companies will actuate the best bulk of ally you may have.

None of the ally in a LLP are amenable for the accomplishments of the added partners, appropriately accountability charcoal on a alone accomplice for their business. However, as a accomplished they accept to accept one alone who maintains absolute accountability for the Affiliation as a whole. At the aforementioned time, anniversary of the ally runs the business calm as a whole.

All profits in a LLP are disconnected a part of the ally evenly, and they are amenable for assets tax depending on the bulk of income.

As a aftereffect of Bound Accountability Partnerships in the United States, the Uniform Affiliation Act was created to advice administer the LLP as it confused beyond States.

Nevada Corporation

Nevada is altered from added States in several agency if it comes to a corporation. The acknowledged arrangement actuality offers you the adeptness to acquiesce the lath of admiral to run your aggregation while attention you after acute the accumulated veil. There are abundant laws attention businesses in Nevada that aren’t apparent in added States.

No amount breadth in the country you operate, if you are congenital in Nevada you are adequate by Nevada laws if anyone attempts to accompany acknowledged activity adjoin your company. Nevada’s law is absolute anon benign to the corporation, which has abounding safeguards in abode to anticipate cher baseless lawsuits to occur.

Outside of the $200 Business License Fee in Nevada you will not be answerable authorization tax, accumulated assets tax or claimed assets tax by the State. This agency alfresco of federal tax obligations you will accept no added tax liability.

However, abomination abnormally annexation is college statistically in Nevada. As a aftereffect cases of agent annexation and artifice are a part of the accomplished of anywhere abroad in the United States.

Delaware Corporation

Forming a Affiliation in Delaware is a astute decision. As over 60% of the above Fortune 500 were congenital here, you can brainstorm the abiding bread-and-butter bearings available. This is a abode to advance and body your company.

With that in apperception the acknowledged arrangement is aswell bureaucracy to accept the Affiliation laws added than any added state. This will accommodate fair and quick trials if annihilation goes afore a adjudicator in commendations to your corporation. In fact, Delaware has created a Delaware Cloister of Chancery to handle all of these issues. They handle all the diplomacy that action as a aftereffect of business practices.

Another benefit, Delaware has abounding of the above acclaim agenda banks that relax on the absorption ante provided actuality for corporations. You will of advance accept to use banks that are created beneath Delaware Law and not Federal Law to accept these benefits.

You aswell accept the centralized diplomacy article protection. If your business is created in Delaware you are adequate by the laws of Delaware even as you aggrandize beyond the country. Appropriately authoritative any aggregation abnormally a acclaim adjustment aggregation even added adequate in this State.

Best of all there is no assets tax in Delaware. While you still accept Federal Taxes, Delaware does not tax on income. So you end up with added accumulation from your income.

On the cast ancillary of all this, Delaware does tax heavily on coffer items. Absorption on coffer accounts and cyberbanking items are burdened college actuality than anywhere abroad in the country. Another abrogating account is you are burdened heavily on any bearding casework or acreage in attention to your business. This includes bare allowance cards and added items.

If your aggregation becomes a franchise, you are burdened a abundant authorization tax. This is to abash absolute corporations from aggravating to cull into the abridgement to bolt a break.

With the advice provided, you should be able to accomplish a reasonable and complete accommodation on the best breadth to alpha your new business. Backed with information, both in the realms of pros and cons, you should be able to adjudge which business is appropriate for you to begin. An advocate that specializes in business law will aswell be able to activity you accomplished acquainted data on what avenue would be best for you as well. As all factors of a business accept altered items to consider.