The C corporation (sometimes called a “C corp”) is the oldest business structure, and one of the most common seen in the business world today. It’s typically what comes to mind when the average person hears the word “corporation”.
Pros and cons
The most notable advantage of filing as a C corporation is the C corp’s ability to raise capital through the sale of stock. This means that there are more options for raising capital than some of the other business structures. The structure is robust since there are so many rigid regulations and requirements.
A C corp requires owners to follow very specific processes to both start and maintain the business. These tasks may overwhelm a smaller organization. Also, the owners of a C corp may be subject to double taxation, as they would be taxed at both a business and personal level.
Most states only require one director in order to start a C corporation.Some states impose a minimum number of directors that’s directly related to the number of shareholders the company has. This required number is typically never higher than three and there is no maximum limit.
The name you choose for your C corp is an important decision, as it will be how you represent yourself to potential partners and clients. With that in mind, we recommend that you take some time to craft a name that you’ll be proud to have representing you and your business.
Legally speaking, your name must be unique, and not deceptively similar to any other trademarked name or business. It is also required that your name not be used to intentionally misrepresent the products or services you offer. For C corps, nearly all states will also require you to add a signifier of your corporate status, such as “Company”, “Corporation”, “Incorporated”, or a relevant abbreviation.
There are a few regulations that a C corp must comply with. Included in the requirements is the filing of an annual report, holding documented regular meetings, and keeping close and detailed record of all stock transfers.
The incorporation process
Choose your state of incorporation
Many new prospective C corp owners do not realize that it is possible to incorporate in states other than the one in which they live or operate. However, through a process called foreign qualification, it is. However, there are a few factors that should be considered before you make this decision.
If your organization is a small, focused company that is held by only a few owners, and operates in a small area, it may be advisable to file locally. The main reason for this is that many states require corporations that foreign qualify to pay additional taxes or fees that can be substantial for smaller companies. There are also some logistical issues that are related to foreign qualification that can cause unforeseen additional expenses.
If your organization is large, has many shareholders, or operates on a grand geographical scale, foreign qualification may be the best option for your company. Each state offers different tax and filing implications, and your company may be better off establishing itself in a foreign state in order to take advantage of those benefits. Some of the most popular states in which companies typically choose to foreign qualify are Nevada, Delaware, and Wyoming.
How can I start the incorporation process?
Almost all states require potential C corps to file a set of documents called the Articles of Incorporation (sometimes referred to as a Certificate of Incorporation) in order to be formally recognized. These documents contain basic information about the company, its owners, and its directors. This must be submitted before the company can begin operations.
Once this has been completed, there will be set of formal compliance processes that your business must observe:
- Hold an organizational meeting. — You must hold a documented organizational meeting with your initial board of directors. During this meeting, you will need to adopt a written set of by-laws, approve resolutions establishing the company’s initial financial accounts, and appoint officers.
- Manage stock distribution. — Your company must then distribute all initial stock, carefully documenting the process in an official ledger. This ledger will need to be consistently updated to reflect future stock transfers.
There may be some state specific requirements that you must observe during these processes as well. Our state-by-state compliance guides can help you determine if this is the case for your state. Also, keep in mind that C Corps also have many ongoing compliance requirements that will need to be attended to on an annual basis.
In certain states (notably Arizona, New York, Nebraska, and Pennsylvania), you may be required to publish a notice of your C corp’s formation in a local newspaper.
There are three different formal leadership positions that comprise the governance of a C corporation. Each position has its own role and responsibilities. An individual is able to (and often will), serve in more than one of these positions. They are as follows:
- Shareholder — Shareholders are the owners of the corporation. They are authorized to vote in the election of directors and on other major corporate issues. Shareholders are not responsible for the day-to-day operations of the company.
- Director — Directors are elected by the shareholders and are authorized to make major business decisions in a manner that will be in the best interest of the company’s investors. A director also is tasked with supervision of the company’s officers.
- Officer — Officers are responsible for managing the day-to-day operations of the company. They report to director-level employees of the C corp.
C corporations and their owners are taxed separately from one another, which results in what some refer to as “double taxation”. This means that the corporation will be taxed on its profits (at the business level) and then each individual owner will be taxed again on the income distributed to them at a personal level. One of the benefits of the taxation regulations of the C corp is that you will avoid paying a self-employment tax.
C corps are unique in that they are able to sell ownership shares to the general public in order to raise capital. This is accomplished via the distribution of stock. In order to sell stock, the C corp must explicitly list the number of initially distributed shares (along with their par value) in their Articles of Organization. Once the number of shares has been recognized by the state, the company is able to do whatever they wish with each share. The number of shares (and their par value) may be altered in the future, by filing a document called a share amendment with the state.
Swyft can help!
The process of filing as a C corp may seem complex. But the professionals here at Swyft are here to guide you through each step. Contact us today!