What is C Corporation: Everything You Need to Know
What is a C-Corporation? It's a business structure that's a separate legal entity from its owners — known as shareholders — and it provides its shareholders with limited liability protection. Corporations enjoy perpetual existence as well.3 min read
What is a C-Corporation? It's a business structure that's a separate legal entity from its owners — known as shareholders — and it provides its shareholders with limited liability protection. Corporations enjoy perpetual existence as well.
What Is a C-Corp?
When a business incorporates, it's automatically classified as a C-Corporation, also known as a regular corporation. Because a corporation is viewed as a separate legal entity from its owners, the shareholders are only liable to the amount they've invested in the company. Shareholders' personal assets are not at risk if the corporation is sued, as they would be in a sole proprietorship or partnership.
Any corporate debts are considered the corporation's responsibility. The limited liability that shareholders enjoy is called “the corporate veil.”
Since the corporation is a separate entity, the IRS views it as an individual taxpayer. This is why corporations are subject to double taxation. Company profits are taxed twice: once on the corporate level and once when they're distributed to shareholders as dividends.
If a business meets certain eligibility requirements, it may elect S-Corp status in order to avoid double taxation.
A C-Corp's shareholders elect a board of directors, which is responsible for overseeing policies and making important business decisions. When a C-Corp loses shareholders because they leave or pass away, the corporation continues to exist since it's considered an independent entity.
Structure of a Corporation
In a small business, the owner(s) may fill multiple roles that are handled differently than in a corporation's more formal structure, which contains the following:
- Shareholders are the owners of the company; they own shares of stock in the corporation. They elect directors and are responsible for amending corporate bylaws. They must approve major company decisions, such as the sale of corporate assets or mergers. Only shareholders can dissolve the corporation.
- Directors manage the corporation and make major decisions for the company. They issue stock and elect officers.
- Officers include a president, treasurer, and secretary. They handle day-to-day operations of the corporation.
- Employees work for the company and receive a salary.
Running a Corporation
In some cases, when owners run a corporation more like a partnership or sole proprietorship, courts have been known to overlook the company's corporate status and hold the shareholders liable. It's not enough to file an Articles of Incorporation to have limited liability.
To maintain your business's corporate status, you must follow some guidelines, such as the following.
Act like a corporation
Before doing business, take care of the following:
- Issue stock certificates to stockholders.
- Establish a corporate record book, which will store company bylaws, records of stock holdings, minutes of meetings, and your Articles of Incorporation.
You should hold shareholder and board of director meetings regularly. At least once a year is required. By keeping minutes, you can record important actions and show that the appropriate parties voted to approve resolutions.
You must also keep personal accounts separate from corporate accounts to show the separation between owner and business.
One way to demonstrate this separation is to include the full name of your corporation — including the Inc. or equivalent designator — on all of the following:
- Phone listings
Act like a corporate officer
As one example, when the corporation's president signs his name on checks and other company correspondence, he should indicate his position as president to show that he's acting as an agent of the company and not on his own.
Obtain adequate insurance coverage and capital investment
You must protect your corporation from lawsuits and debts that can end your business. For instance, if you attempt to protect shareholder assets by forming a corporation and not doing anything else to strengthen or protect the business, this could be a reason to ignore your corporate status in a lawsuit.
You should invest sufficient capital to handle all business activities and obtain the necessary insurance to protect against risks to customers or employees.
It will take some time and resources to incorporate, and it can be helpful to consult with legal and tax professionals when starting such a formal business. By meeting the requirements and sticking to all guidelines, you'll retain the important benefits this business structure provides.
If you need help understanding C-Corporations or other business types, 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.