How to Start a C Corporation - Form and Operate Steps
Source: DHgate, Tag: E-Commerce Tips
It is the desire of every entrepreneur or small business owner to grow their enterprise into a corporation. A corporation is a business structure that permits owners to establish their firm as a separate legal entity.
When you incorporate your business, it enjoys what is termed "corporate personhood," meaning your company is like a person and has the right to get into contracts; it can take loans or lend money, sue or be sued, and more. For this reason, a corporation's owner and shareholders cannot be held personally responsible for its debts and obligations.
While there are different categories of corporations, c corporation is the most basic. It has unlimited shareholders and can be public and listed on the stock exchange. The condition implies that members of the public can buy the company's shares, making them partial owners.
After gaining a deeper insight into corporations, you may wonder how to start a c corporation. Well, this guide will take you through the necessary steps that will enable you to form and operate a c corporation. So let's dive into it.
When to form a C corporation
Your company can operate as a C corporation if:
You want to give stock to over 100 shareholders
To allocate shares to international investors.
You would like to give out both preferred and common shares. The difference between the two is that common shares come with voting privileges, while preferred shares do not have such privileges. However, preferred shareholders jump the line regarding top priority when it comes to getting dividends when the business is liquidated.
How to start a C corporation?
The prospects of operating a corporation may be exciting, but it is worth noting that it can be tedious. The registration process is critical and must have an approach with due diligence. Nevertheless, once you are convinced to have what it takes to have a C corporation, here is a step-by-step guide to starting and operating one.
Choose s corporate name.
Selecting a name may sound like a basic thing, but choosing an ideal name for your C corporation is a critical move. Your corporation’s name must not match or be identical to existing corporation names. Make sure that your leas with the office of the local secretary of state to check for the availability of your proposed corporate name.
Furthermore, if you intend to operate a business under the name of your corporation, check with the relevant authorities within your state to confirm the availability of the service mark or trademark. Alternatively, consider inquiring from an attorney or getting legal advice for assistance on the process of getting a trademark.
Additionally, check to confirm the availability of the domain name linked to your selected brand name. Lastly, contact a search in the local directories to ascertain if there is any local business currently on the same or a related name.
Organize leadership
This is the point where you choose the directors and officers of your corporation. The responsibilities of the directors are to oversee business operations and make the company's decisions. Additionally, the directors appoint the officers who are in charge of daily operations. Some leaders can serve as directors and officers in specified capacities.
Make sure that all the directors and officers are in place before completing the paperwork. Confirm with your state laws to know if a C corporation must have a required number of directors and officers.
Note that your corporation's directors must hold regular meetings, and you must keep records of each proceeding.
Create corporate bylaws
Once you have the leadership of your corporation in place, you then have to draft bylaws. Corporate bylaws are regulations that will guide its operations, the conduct of its meetings, and the voting process. Additionally, bylaws are crucial in setting forth the rights and responsibilities of each corporation's shareholder, director, and officer.
Nonetheless, this is optional for your corporation to get approval by all states. Therefore, it is important that you confirm with your local secretary of state office to know if corporate bylaws are a must-have for your business to operate in your preferred state of operation.
File articles of incorporation
Articles of incorporation or certificates of incorporation are necessary documents in the formulation of a C corporation. Even though some states might have stricter requirements, the certificates of incorporation generally outline the required company information, including the name of the business, street address, and the type and number of shares issued.
At this point, you are responsible for preparing your articles of incorporation, getting the incorporator to sign them, and filing it with the secretary of state where you intend to operate your business. Please note that during the registration process, you may be required to pay a filing fee to get an extra certified copy of the certificate.
Write a shareholder's agreement.
If need be, ensure that you draft and execute a shareholders’ agreement. The document is popular among small C corporations that would wish to make restrictions on who becomes a new shareholder. Further, it sets provisions for how the current shareholders can sell their shares and exit the corporation.
Keep corporate minutes
Corporate minutes comprise the documentation of the proceedings of the meetings of directors and shareholders. The minutes allow the corporation to formalize its agreements on relevant resolutions and appointment of directors and other officers. Therefore, the actions taken in each board and shareholder meeting must be recorded in the form of corporate minutes to be binding to all.
Issue shares of stock
Preparing and executing stock certificates and updating the corporation's share ledger is a crucial step in the operation of a C corporation. The shared ledger is critical in keeping track of the owners of the shares and the number of shares they own. Please note that your corporation will have to keep track of the number of shares it has issued, who owns the shares, and how many outstanding shares are.
Obtain an employer ID
An employer identification number is primarily the Social Security number of your C corporation. Whereas IRS issues social security numbers to people, businesses get employer identification numbers.
The number is vital in opening a corporate bank account and making tax returns. It is important to note that some of the questions asked when applying for the employer identification number involve tax implications. Therefore, the best practice is to consult a tax expert before going for registration. You will get your employer Identification number on submission of a SS-4 form to the IRS.
Choose a tax election
At the federal level, a corporation can choose to either be taxed as a C corporation or an S corporation. At this juncture, it is essential to note that either choice involves significant tax consequences. Further, it is essential to understand that you will not have to file any additional returns if you wish to be taxed by IRS as a C corporation.
Obtain the necessary permits and licenses
It is important to check with relevant authorities to confirm if your corporation needs some licenses and permits to operate. If they are necessary, please apply for local and state agencies. Having considered all this should be able to start and operate your C corporation smoothly.
Things to consider when operating as a C corporation
There is no doubt that running your enterprise as a C corporation is more challenging than operating it as an LLC. When operating as a C corp, there ideally are more rules and regulations that you will have to adhere to. Nonetheless, the complexity is necessary for a company with over 100 shareholders and attracts international and international investments from other corporations.
Here are a few things that are involved in the operation of a C corporation
Annual meetings. A C corporation is obliged to hold at least one meeting per year involving shareholders and the board of directors.
Comprehensive record keeping. The proceedings of those meetings must be recorded in line with the corporate’s bylaws. A C corporation should also keep a record of the board’s decision during votes, a detailed list of shareholders' names, and the number of shares each hold. The corporate bylaws should also be kept at the primary business location.
Up-to-date reporting. A C corporation should file updated annual reports and financial details for the benefit of the corporation’s shareholders and potential shareholders.
FAQ
What is the tax rate for C corporations?
When you organize your business as a C corporation, you are eligible for a corporate tax rate of 21% of your taxable income.
What are the advantages of a C corporation?
The are several benefits to turning the structure of your business into a C corporation. They include:
Limited liability
One of the most significant advantages of a C corporation is that it offers its shareholders personal liability protection. The owners of the company are only accountable for what they invested in the business, as their personal property is not subject to seizure. This deal is better than what you get from either a general partnership or sole proprietorship, which holds owners to account for a company's debts and obligations.
Credibility
Registering your business as a C corporation becomes more credible to potential customers, employees, partners, and vendors. Additionally, investors are reluctant to work with firms that are yet to acquire a corporation or LLC status since they do not have liability protection risking investors' funds. Therefore, registering as a C corporation will enhance your legitimacy by attracting more investors. It is also easier for a credible company to sell stock to raise capital.
Unlimited life ownership
The life of a C corporation is infinite. If the owner dies or decides to sell his shares, the company will remain and keep doing its business. Further, the ownership in a C corporation is transferable, ensuring the continuity of the business.
Tax advantage
Attaining a C corporation status will give your company tax advantages. For example, health insurance premiums paid by owners are tax-deductible. Additionally, C corporations are not subject to worker compensation taxes, payment of Social Security, and Medicare saving the owners from such expenses.
What are C corporation requirements?
Registration of a C corporation can be very demanding. The process involves a lot of paperwork which varies from state to state. Further, you will have to keep doing things such as filing annual reports to remain compliant. Other basic requirements needed to operate a C corporation include the following:
Certificate of incorporation
Corporate minutes
Corporate bylaws
A certificate of good standing to operate in other states.
How do C corporation owners get paid?
Owners of C corporations are paid on salary terms only. Even though they may be subject to bonuses and other benefits, the salary remains their primary source of income.
Can I take money from my C corporation?
You can get money from your C corporation, though not directly, but through reimbursement or generous company-paid salaries and bonuses to avoid double taxation. Note that it is better to withdraw in the form of compensation and not dividends.
Conclusion
Starting and operating a C corporation may seem like a challenging task at the start, as it involves many regulations, detailed checklists, and strict deadlines. However, the benefits that come with operating your enterprise as a C corporation are worth the struggle. The prospect of selling an unlimited number of shares is every business owner’s dream. Further, a C corporation has a built-in funding approach that comes in handy in the initial stages of smaller enterprises. Overall, the C corporation is not an opportunity meant only for huge multinational companies, and you can also follow these steps and turn your small business into a flourishing C corporation.
Therefore, ensure that you undertake each step with due diligence, and whenever you experience difficulties, seek expert assistance and support. When the registration is completed successfully, the C corporation structure will undoubtedly transform your company into a business entity that will witness long-term success.