C-Corporation Guide: How to Form a C-Corporation

A C-corporation, or C-corp, is a legal business entity that shareholders own. Those shareholders elect a board of directors, who in turn choose a management team. Major corporations that issue shares of stock via the New York Stock Exchange (NYSE) and the NASDAQ are C-corporations, but privately held small businesses can also be C-corporations.

The Internal Revenue Service (IRS) taxes a C-corp for its business income, meaning its owners must also pay personal income tax on money earned from stock dividends. A business can avoid double taxation by organizing as a limited liability company (LLC) or by seeking S-corporation status, but it will be subject to other restrictions such as the number of shareholders it can have. A C-corporation also grants limited liability protection to its owners. If the company incurs debt or faces a lawsuit, the business owners are not held personally responsible, and their personal assets are not at risk. A lender or a litigant can go after the business itself—not its individual owners.

An S-corporation, or S-corp, is a business entity designated under Subchapter S of the Internal Revenue Service's internal revenue code. Sometimes referred to as a "small business corporation," it combines the protection of an LLC with the corporate-level status of a C-corp.

The IRS grants certain tax advantages to a business with S-corp status. The corporation does not pay federal income tax; rather, its profits pass through to the business owners, who report them on their personal income tax returns. A business with S-corporation status avoids paying double taxation on its corporate income. An S-corporation also grants limited liability to its owners.

C-corporations and S-corporations differ in a few ways.

• Taxation: An S-corp is a pass-through entity that does not pay corporate tax. A C-corp must pay taxes on its business income, and then its owners pay federal income tax on their corporate dividends.
• Membership: The internal revenue code caps S-corporation membership at 100 owners. A C-corporation can publicly issue stock certificates and take on an unlimited number of owners. All publicly traded corporations are C-corporations.
• Types of owners: The owners of an S-corp must be individuals, trusts, estates, or non-profits. Any entity type can invest in a C-corp, including institutional investors such as a mutual fund.
• Class of stock: An S-corporation can only issue one class of common stock. A C-corporation can issue multiple classes, such as Class A shares, Class B shares, common shares, and preferred shares.
• Nationality: An S-corporation must be domestically based, and its owners must be U.S. citizens. A C-corporation can be based anywhere.

If you aim to acquire many investors, have international partners, or engage in overseas sales, a C-corporation is the appropriate entity type for your business.

1. 1. Select a business name. Your C-corp will be a legal entity, and it must have a legal name registered with the government. Some companies have one legal name, but do business under another name. This is called a DBA, which stands for "doing business as."
2. 2. File articles of incorporation. To establish your business, you must submit articles of incorporation to your state's secretary of state. Expect to pay a filing fee. After you’ve filed successfully, the state will send you a certificate of incorporation.
3. 3. Obtain an Employer Identification Number and a bank account. The business will need an Employer ID Number (EIN) from the IRS. It will also need its own business bank account.
4. 4. Create an operating agreement. A business's operating agreement establishes laws and bylaws at the shareholder level. It names ownership stakes, can set limits on the number of shareholders, and sets rules for financial distributions.
5. 5. Name a registered agent for the business. A C-corporation is required to have a registered agent who accepts legal documents and tax documents on behalf of the company.
6. 6. Name a board of directors. A C-corporation must have a board of directors elected by the shareholders of the business. The board must conduct quarterly meetings and make minutes available to all owners.
7. 7. Issue stock certificates. C-corp owners are referred to as shareholders, and they should be given stock certificates signifying their ownership stake in the company.
8. 8. Apply for licenses and permits as necessary. Some C-corporations operate businesses that are regulated by state and local agencies. Obtain the appropriate permits and licenses before conducting business.

For growing businesses, the advantages of organizing as a C-corporation are clear.

• Liability protection: Business owners that organize as a C-corp are shielded from liability for their company's misdeeds or financial debt, meaning their personal assets cannot be seized in a judgment against the business.
• Avoidance of the self-employment tax: A C-corporation can pay Social Security and Medicare taxes on behalf of its owners. An LLC cannot, which subjects those owners to a self-employment tax.
• Easier to raise capital: As a business entity, a C-corporation is designed to make it easy to take on investors. These investors offer money for shares in the company. S-corporations can also take on investors, but there are limits to who may own shares in an S-corp.

There are some drawbacks to operating your business as a C-corp.

• Double taxation: C-corps incur federal taxes on both their corporate returns and owners' personal tax returns. S-corporations and LLCs avoid this double taxation pitfall.
• Prohibitive startup costs: Some states impose strict rules on C-corporations, and the initial filings and startup fees can be prohibitive for some entrepreneurs.
• More cumbersome to maintain: A C-corporation must have an active board of directors, and it must submit annual reports to its shareholders. Some states require more filings and fees from C-corps than they do from LLCs or S-corps.

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