Class C Corporation: Everything You Need to Know
Class C corporation is the default form of corporation. This means that any corporation formed will be a C corporation if it is not converted to an S corporation. 3 min read
Class C corporation is the default form of corporation. This means that any corporation formed will be a C corporation if it is not converted to an S corporation. A C corporation is one of the most common types of business structure in the U.S. because it offers some important benefits to help a business minimize losses and achieve greater growth. However, it also comes with certain disadvantages.
What Is a C Corporation?
A C corporation is a business entity that provides unlimited growth potential for a business through the sale of stocks, making it more attractive to wealthy investors. It is also allowed to have as many shareholders as it wishes. Many businesses choose to elect C corporation status because it enables them to limit their financial and legal liabilities. A C corporation pays taxes on its income at the corporate level and its shareholders' dividends at the individual level. This tax process is also referred to as double taxation.
However, a corporation can opt for “pass-through” taxation by electing S corporation status. An S corporation also protects its owners from personal liability, but it has a number of restrictions. It can only have a maximum of 100 shareholders and issue shares to citizens or permanent residents of the U.S.
Structure of a C Corporation
Every C corporation must have the following positions:
- Shareholders – The shareholders own the stock of a corporation. They are responsible for appointing a board of directors, making amendments to the articles of corporation and bylaws, and approving important actions such as the sale of corporate assets and mergers. Only the shareholders can dissolve the corporation.
- Directors – The directors are the ones who manage the corporation. Their responsibilities include issuing stocks, appointing officers, and making major business decisions.
- Officers – A corporation is also required to have a president, treasurer, and secretary. These officers are in charge of its day-to-day operations.
- Employees – Employees perform a wide range of duties to keep a corporation running and are paid a salary for their work.
Advantages and Disadvantages of a C Corporation
- Limited liability for shareholders, directors, executive officers, and employees.
- Perpetual existence even after the owner or founder leaves the company.
- Greater credibility with vendors and lenders.
- Unlimited potential for growth because of unlimited shares.
- Unlimited number of shareholders.
- Tax-deductible business expenses.
- Double taxation with revenue being taxed at the corporate level and again at the individual level as shareholder dividends.
- Expensive to form as the filing of the Articles of Incorporation comes with high fees.
- More regulations and formalities because a C corporation's complex tax process and liability protection draw more scrutiny from the government.
- Cannot write off corporate losses.
How to Start a C Corporation?
The process of forming a C corporation varies from one state to another. Nonetheless, most states require you to undergo the following procedures:
- Select a legal name for your corporation – The name you choose must not be the same as that of another existing business. Also, it must end with the abbreviation “corp.,” “inc.,” or “ltd.”
- Draft and submit the Articles of Incorporation to the Secretary of State – The Articles of Incorporation typically includes information such as the name and address of your corporation, nature of your business, name of registered agent, and corporate by-laws.
- Provide stock information – Such information includes the number of initial authorized shares, number of stock classes, and per share value.
- Obtain an Employer Identification Number (EIN) – Get an EIN either by filing Form SS-4 or applying online at the website of the IRS.
- Apply for tax identification numbers – Obtain identification numbers that are required in your state or county for paying certain taxes, such as unemployment, disability, and other kinds of payroll taxes.
- Pay sales taxes – If you are planning to collect sales taxes on the products or services you sell, you may be required to pay sales taxes. Check with the tax authority of your state to find out.
- Get the necessary licenses and permits – Depending on the nature of your business, you may have to obtain a license or permit to conduct business legally.
- Purchase insurance – Although a C corporation provides liability protection for its shareholders, it is important to have adequate insurance to protect your business assets.
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