C Corp Liability: Everything You Need to Know
Shareholders need not worry about C Corp liability as the C Corp is considered a separate legal entity from its owners. 3 min read
2. Disadvantages of a C Corp
3. Limited Liability Exceptions
4. Organizing Your C Corp
5. Maintaining Your C Corp
Shareholders need not worry about C Corp liability as the C Corp is considered a separate legal entity from its owners. Generally, larger corporations with more than 100 shareholders are C corporations; furthermore, any company that wants to go public, obtain venture capital, or take on equity investors are also C Corps. With that said, a C Corp can also consist of only one person. All C Corps are owned by shareholders who elect a board of directors that make the business decisions. This type of business structure is good for businesses that offer products, have employees, and store inventory in a warehouse.
Starting off as an S Corp
It is common for businesses to form an S Corp in one of the following two circumstances: during the first few years of the company’s existence or if the business is losing money and has less profits. Once the business becomes profitable, it will usually convert to a C Corp.
Disadvantages of a C Corp
While there are several advantages to operating a C Corp, there are also some disadvantages too, including the following:
• Double taxation, as the company is taxed at the corporate level and then again at the personal level if dividends are paid to the shareholders
• Expensive to form, as there are many fees that come with filing the Articles of Incorporation, along with state fees associated with incorporating
• Corporate formalities, as corporations have additional government oversight and more complex tax requirements
• The filing of corporate taxes might require a tax professional, which will cost additional money
• Shareholders in a C Corp can’t deduct corporate losses on their personal tax returns
Limited Liability Exceptions
A corporation offers its shareholders limited liability, and therefore, they cannot be held personally liable for the debts and obligations of the business.
However, there are some exceptions to this rule, particularly if a shareholder personally injures someone, if a shareholder personally guarantees a loan or business debt on behalf of the business in which the corporation fails to repay, if a shareholder fails to pay taxes on the amount deducted from employee compensation, if a shareholder engaged in fraud or another illegal activity that causes a loss to the business or third party, and if a shareholder treats the corporation as an extension of him or herself. Furthermore, if the court rules that a corporation doesn’t actually exist, then the shareholders will be personally liable for any losses incurred by third parties.
Organizing Your C Corp
If you are ready to form a C Corp for your business, you will first need to choose the state in which you want to operate. Thereafter, you’ll choose a company name and file the articles of incorporation with the Secretary of State. You should also issue stock certificates to the shareholders when forming your business.
Next, you’ll need to apply for a business license and any other applicable certificates that pertain to your industry. Furthermore, all C Corps must file Form SS-4, which is a request to obtain an Employer Identification Number (EIN).
You might also need to apply for a State Identification Number depending on the state in which you form. Some other requirements include applying for unemployment and disability taxes if you have employees, along with payroll taxes.
Maintaining Your C Corp
There are certain formalities that must be adhered to when maintaining your C Corp; it is important to follow such formalities, as this will prevent legal disputes or potential personal liability from occurring. Some of these requirements include the following:
• There must be enough money invested in the company; this money is also referred to as capital
• A C Corp must have at least one meeting per year in which both shareholders and directors attend
• The business must remain transparent in how it operates
• The business must maintain voting records for the directors and owners, which must include the names and percentage of ownership for each person
• The business must have drafted company bylaws, which are to be kept on file at the company’s primary location
• The C Corp must file annual reports, financial disclosure reports, and financial statements as necessary for federal and state tax purposes
If you need help learning more about C Corp liability, or determining whether a C Corp is right for your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.