Starting a C Corp: Everything You Need to Know
Starting a C corp involves reserving a name, filing the articles of incorporation with the state, appointing a board of directors, and issuing stock.3 min read
2. Cons of C Corporations
3. Steps Taken to Form a C Corp
Starting a C corp involves reserving a name, filing the articles of incorporation with the state, appointing a board of directors, and issuing stock. The new C corp also needs to get the relevant business permits and licenses, as well as obtain an EIN.
Should You File as a C Corporation?
A C corporation is an entity type that is suitable for businesses that want to get funding by offering stock to the public. Before you start a C corp, you might need to know some basic pros and cons of C corps when compared with other entity types. The pros of C corps include:
- No Limitations on Shareholders. C corps have no limitations on the number and type of shareholders. They can issue a variety of stock types, including common and preferred stock.
- Ease of Transfer of Stock. Stock in a C corporation can easily be bought and sold without the shareholder seeking the permission of the other shareholders. This makes it an ideal business type for expanding because the ease of exchange of stock attracts investors.
- Limited Liability Protection. C corporation shareholders and directors are protected from liability arising from the corporation.
Cons of C Corporations
- Double Taxation. The C corporation is the only major entity type that qualifies to pay federal corporate tax. This tax can slice away up to 21 percent of the corporation's profits every year and reduces the dividends of the shareholders.
- Management Structure and Operations. The C corporation must have a formal structure, which includes directors and officers. C corporations are also required to hold a number of formal management meetings. These requirements can consume time and the resources of the corporation.
Steps Taken to Form a C Corp
- Reserve a Name. Registering a name is the first step in starting a C corp in many states. The name can usually be reserved for a couple of weeks by paying a small fee to the secretary of state. Names of new C corps should generally be distinguishable from the names of other entities already registered in the state. Foreign C corps that were incorporated in other states and wish to register can reserve the corporation's name if it is available or register a “Doing Business As” or DBA name.
- Appointing a Registered Agent. State laws normally require each C corporation to have a registered agent for service process in the state. The registered agent is responsible for receiving legal papers and notices and forwarding them to the corporation.
- Appointing Directors. C corporations are required to have directors, and the corporation must appoint the directors either before or immediately after incorporating. The directors are tasked with overseeing the management of the C corporation. They bridge the gap between the corporation's officers and the shareholders.
- Filing the Certificate of Incorporation. The C corporation formally registers with the state by filing a document called the certificate of incorporation or articles of incorporation. This document is usually submitted to the secretary of state. The certificate of incorporation documents basic details about the corporation, and its filing marks the official formation of the corporation.
- Holding the First Board of Directors Meeting. The newly formed C corporation must hold its first board of directors meeting. This meeting marks the start of a number of formal meetings the corporation must hold every year. The directors use their first meeting to adopt corporate bylaws, appoint managers, and pave the way for the corporation to issue stock. Corporate bylaws are not a requirement in most states but are important to the smooth running of the corporation.
- Issuing Stock. The new C corporation is now ready for the important step of issuing stock. The process of stock issuance should be governed by the corporate bylaws of the corporation.
- Getting Permits and Licenses. Most C corporations need state and federal licenses to operate. The exact licenses or permits they need depend on the state and industry the corporation is involved in. You can find out details about the permits and licenses for your C corporation in the SBA guide and from the local Chamber of Commerce.
- Getting an Employer Identification Number (EIN). The C corp now needs to register with the federal authorities. This can be achieved by obtaining an EIN. C Corps can apply for the EIN online.
The new C corporation can now get a corporate bank account and start working in earnest.
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