If you are considering starting a business, you may be wondering what business structure will work best for you. There are several options, and each business type has its own benefits and drawbacks that you should consider. For those that want asset protection, a corporation may be high on the list of possibilities. However, corporations also have some serious drawbacks that you should consider as well—from taxes to filing requirements.
The Basics: What is a C Corporation?
When most people hear the term “corporation,” they often think of large buildings in downtown metro areas. The assumption is that a corporation is always enormous and overwhelming is not at all accurate. In reality, corporations can be the right business structure for companies of all shapes and sizes.
Generally speaking, there are two types of corporations: S Corporations and C Corporations. These get their names from the portion of the tax code that applies to the business. C corporations are taxed separate and apart from their owners while S Corporations are not, but both are considered separate legal entities.
Business owners choose to use C corporations as their business structure because they offer excellent asset protection advantages, which limits the owners’ legal and financial liabilities for the company. The vast majority of corporations in existence today are C corporations, and that tax treatment is a “default” for the IRS’s purposes.
Creating a C Corporation
Forming a C Corporation is more complicated than many other types of business structures. In fact, many would argue that it is the most complex regarding formation, second to perhaps an S Corporation.
To create a C Corporation, you must work with the state in which you want to incorporate and abide by their regulations and requirements. While incorporating in your home state is usually a good idea for small businesses, there may be certain advantages to incorporating in another state that may have more favorable laws or tax treatment. Thankfully, most states have a similar process for incorporation.
Choosing a Legal Name
The first step in creating a C Corporation, like many other business structures, is to determine what your legal name may be. Usually, the Secretary of State will keep a listing of all company names in the state, and you can search it to determine if your name will be unique. It is important to have a business name that is different enough from others so as not to cause confusion or potential copyright or trademark problems.
Once you have chosen your name, you should register it with the Secretary of State. For corporations, the Secretary of State will sometimes hold the name for a short period while you gather the rest of the paperwork necessary to complete the registration process.
Articles of Incorporation
You must file what is referred to as “Articles of Incorporation” with your state. In some states, it may have a slightly different name, but the idea is the same. This document will usually include the following information:
- Corporate name
- The registering agent and office location
- The purpose of the corporation (usually this is extremely general)
- The duration of the company (often listed as perpetual)
- The number and type of authorized shares, issued shares, and the classification of each type of stock
- The name and contact information of the directors of the corporation
- The name and contact information of those who created and completed the Articles of Incorporation
Some states may also require additional information, so it is important to follow your state’s guidelines to provide the correct information.
Issue Stock and Apply for Permits and Licenses
Once the Secretary of State has approved your application, you can begin to issue stock to your shareholders. Then, you can initiate the process of obtaining the necessary permits and licenses required to operate your business. These will vary a great deal depending on your industry and specific type of business.
Obtain an Employer Identification Number (EIN)
All corporations must get an EIN so that they can issue tax documents and file tax returns. The EIN functions as a “Social Security number” for the business, and the corporation will use it as an individual would. This number is used for both federal and state tax purposes.
You may also be required to apply for other similar identification numbers in your state as well. For example, you may need an identification number for unemployment tax obligations, disability requirements, and workers’ compensation. It is important to register with all of the required state entities as failing to do so may result in monetary penalties.
Benefits of C Corporations
Corporations are considered the “greatest tax shelter in America” by experts in the wealth management and tax reduction fields. While every business structure can deduct business expenses, corporations have the extra advantage of deducting more fringe benefits than any other company structure. These may include things like:
- Health and insurance benefits
- Education assistance
- Stock options
- Moving and housing benefits
- Membership in fitness clubs
- Meals during working hours
- Travel and entertainment expenses
- Retirement plans
In addition to these advantages, corporations are also well-known for their asset protection benefits and set-up for growth potential.
When a Corporation May Not be the Right Choice
Corporations are complex—not just in their formation, but also for their maintenance. You are often required to hold (at least) annual Board of Directors and Shareholder meetings. You must meet certain filing and recordkeeping requirements as set out by your state. The company may also be required to publish annual financial statements as well.
You must keep up with all of these obligations to ensure that your corporation offers adequate asset protection. For some, particularly small businesses, all of these requirements can be overwhelming and cumbersome. It may end up costing more money than it is worth to maintain compliance.
Corporations also result in “double taxation” for shareholders. The company is taxed once at its own tax rate. Then, when owners receive salaries or dividends, they are taxed again. For some businesses, this structure simply does not make sense for their bottom line. Instead, creating an S Corp or LLC may be a better option.
Getting More Information
Knowing and understanding the benefits, drawbacks, and compliance requirements is vital to determining whether a C corporation is the right structure for your business. At Protect Wealth Academy, we offer nearly 100 videos and webinars on wealth management and business information to help you make decisions like this one. After all, knowledge is power! Sign up for a free membership.