C Corporation 101 – Everything You Need to Know

C corporations — or simply, corporations — typically refer to big businesses. They are the classic company with hierarchical structure that textbooks describe. When there is a need for a large or public organization, this is usually what is created either initially or after some time through a conversion.

However, it is little known that a small or privately held company may be a c corporation. Just as with any other company created, it is important to have a business lawyer for documentation, to ensure transactions are valid and to protect the organization with legal dealings.

Before creating a business entity, it is essential to know what type may be needed both at the start and later when there are enough persons and funds to branch out. Many decide to start out slow with a limited liability company or something similar. However, extensive research should be undertaken before committing to one of these possibilities. The advantages and disadvantages should be weighed heavily along with any benefits and negatives. The structure and potential of each type of business should also be considered. Before any contracts are drafted and signed, a business lawyer should be consulted.

Basics of a C Corporation

Unlike many other companies, a c corporation may have separate ownership and management. Shareholders are considered partial owners of the business due to the shares sold so that capital is provided to the organization. Even with these persons owning the company, there is still a board of directors, officers elected and others that manage and see to daily operations so that the business runs smoothly. Because the corporation is legally independent of the owners, the shareholders, directors and officers all cannot be held personally liable for any problems that occur where a lawsuit may occur. While this is similar to an LLC, there are key advantages of owning and running a corporation.

Setting up a C Corporation

Articles of incorporation must be filed with the state, keep minutes as specified by the state regulations, create bylaws and issue share to owners usually through stock. There must be at least one shareholder, but there may be many of these individual owners. Because of the corporate procedures necessary to launch a corporation, it is important that the individuals involved understand what must is involved before starting the process. This may mean choosing a different state as this affects what fees correspond to filing, the ongoing processes and taxes to the company throughout its life. Certain states offer incentives if the owners have a small business, but more may be paid if the company does not reside in the state of incorporation. 

Corporate taxes are often difficult to understand at first. This is because personal tax liabilities are not connected to the losses of the company. Only the income that is earned through business practices is taxed, and only after this occurs do the owners make any money. Corporations are double taxed through initial income and then again when the money filters to the owners. It is crucial for all involved in the corporation to know how the hierarchy, tax structure and transactions work before investing heavily into the organization. This may affect the decision of shareholders in remaining with the company.

Ownership Transfers

Corporations are entities in the business world. This means if someone that has shares in the company dies or is no longer with the business, he or she does not affect the company from running. Stock may be bought and sold independently of the partners, owners or directors. These purchases transfer the rights and ownership as possessed by previous persons to the new owners of the stock. This makes ownership transfer easy and continuous throughout the life of the corporation. This is one of the easiest and quick ways of transferring interest than with most other business entities.

Corporation Risks

Even with the separation of the legal entity from a person’s personal assets, it is still possible for an individual to become personally liable with his or her own assets affected by the outcome of a court case. This may be influenced either the state where the company was incorporated or where the business is being completed. Some companies are formed with the sole intent of defrauding others or other organizations. This may be observed through behavior such as keeping minutes or creating bylaws not occurring. When owners buy items with the company money for personal use, assets are comingled with partners’ estates and similar concerns transpire, the corporation may not be a valid entity. No matter what happens, a business lawyer should be hired to represent the owners, and ensure actions are legal and legitimate.