What is a Corporation?
A C-corporation is a type of business structure that is considered a separate legal entity from its owners. This means that the corporation can enter into contracts, own property, and take legal action in its own name.
Advantages
Some advantages of forming a C-corporation are:
Limited liability protection for owners who are called shareholders and are generally not personally liable for the corporation's debts or legal liabilities.
C-corporations can raise large amounts of capital by selling stocks to investors.
C-corporations can exist indefinitely, even if the owners or shareholders change over time.
C-corporations can deduct salaries and benefits paid to employees, as well as contributions to employee retirement plans and healthcare plans.
Disadvantages
Some disadvantages of forming a C-corporation include the following:
C-corporations are subject to corporate income tax on their profits, and shareholders are subject to taxes on any dividends they receive. This can result in double taxation of the same income.
C-corporations have more legal and regulatory requirements than other business structures, which can make them more complex and costly to form and maintain.
C-corporations are subject to more government oversight and regulation than other business structures, which can lead to higher compliance costs.
While owners generally have limited liability protection, there are certain situations where they may be personally liable, such as when they personally guarantee a loan or commit fraud.
Forming the Corporation
Forming the C-Corporation can be done completely online and for a relatively low cost to do it yourself. Let me show you how to do that by heading to the California secretary of state website.
The first step is to choose a name for your corporation. Make sure that the name is unique, and not already taken by another corporation or LLC. You can check this on the California Secretary of State's website.
The next step is to appoint a registered agent for your corporation. This is a person or a company that will receive legal documents and notices on behalf of your corporation. Your registered agent should have a physical address in California, and be available during regular business hours.
Now, you need to file Articles of Incorporation with the California Secretary of State. This document outlines the basic details of your corporation, such as its name, address, registered agent, and purpose.
Bylaws
Once your Articles of Incorporation are approved, you need to draft bylaws for your corporation. Bylaws are the rules and procedures that govern your corporation, such as how directors are elected, how meetings are conducted, and how profits are distributed. Bylaws are not filed with the state, but they are important for the internal management of your corporation.
The Board
Corporate directors are individuals elected by the shareholders to oversee the management and direction of the corporation. The board of directors is responsible for making major decisions and setting policies for the corporation. The board of directors typically elects officers, such as the CEO and CFO, to manage the day-to-day operations of the corporation. The number of directors and their qualifications is typically set forth in the corporation's bylaws.
Board meetings are held periodically, typically quarterly or annually, to discuss and vote on important matters affecting the corporation. Board members are required to attend meetings and participate in discussions and votes. Board meetings must be properly noticed and documented to ensure compliance with legal and regulatory requirements.
Issuing Stock
When a corporation wants to sell shares to investors, it needs to follow certain steps. First, it must decide on the number and type of shares to be issued, as well as the price. The corporation then prepares legal documents and offers the shares to investors through private or public sales. Once the shares are sold, the corporation issues stock certificates to the shareholders and records the issuance in its stock ledger. This process is complex and requires compliance with legal and regulatory requirements, so corporations should consult with professionals like attorneys and accountants to ensure compliance.
Corporate Taxes
C-corporations are separate legal entities from their owners, which means that they are taxed separately from their shareholders. C-corporations are subject to a corporate income tax on their profits at both the federal and state level. The corporate tax rates are based on the corporation's taxable income, which is calculated by subtracting allowable deductions from its gross income.
Federal Taxes
Corporations, including C-corporations, file taxes using Form 1120, which is the US Corporation Income Tax Return. This form is used to report the corporation's income, deductions, and credits for the year. On the federal level, the corporate income tax rate for C-corporations is a flat 21%. This rate was introduced by the Tax Cuts and Jobs Act of 2017 and applies to all C-corporations regardless of their taxable income.
State Taxes (California)
In California, corporations are taxed based on their taxable income with a graduated tax rate that starts at 8.84% for taxable years beginning January 1, 2020. Additionally, all corporations must pay a minimum franchise tax of $800 per year. The franchise tax is based on the corporation's net income or capital stock, whichever is greater. All California C corporations and LLCs file Form 100 and it's due on the 15th day of the third month after the close of the tax year.
Conclusion
A C-corporation is a business structure that provides limited liability protection, the ability to raise capital through stock sales, and business expense deductions. However, it also has drawbacks like double taxation, legal complexity and cost, and increased regulation. Personal liability may also be a concern for owners. Remember to keep accurate records, file annual reports with the Secretary of State, and comply with all state and federal regulations. It's important to weigh the advantages and disadvantages of forming a C-corporation and to consult with a qualified legal or financial professional before making a decision.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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