All about the merits and demerits of a C-Corporation for entrepreneurs wishing to start a business in the USA
How to form a corporation (C-Corporation) in the USA
A corporation is a legal form of organization of persons and material resources registered by the State for the purpose of conducting business. The corporation is owned by shareholders, the Board of Directors manages the business, and elected officers (officers) manage day-to-day operations. The corporation must adhere to corporate tax laws and regularly file reports and pay taxes.
A corporation, also called Standard Corporation, C-Corporation, or Regular Corporation, can have an unlimited number of shareholders, including foreign citizens, and can be public (when shares are offered for sale to the public) or private (when shares are not sold to the public). Typically, corporation shares are held by founders, board members, and private investors, such as venture capitalists, who may or may not sit on the board of directors.
C-Corporation is the most common type of registration. Registration is carried out with the governing bodies of the State (Secretariat of State) and must comply with the corporate laws of the state in which it is incorporated.
The corporation protects its shareholders from the corporation's obligations in a “limitation of liability” manner. However, C-Corporations also have so-called "double taxation" - first the corporation is taxed on its profits, and then shareholders are taxed on the distributions they receive, such as payments for profits or dividends.
For incorporation, you will need to register your Business Entity, submit a Certificate of Incorporation or incorporation documents and pay a fee. You will also need to develop bylaws and hold a board meeting.
Why register an Incorporate?
Incorporation is one of the best ways to protect your personal assets while doing business. Most people choose to register a business solely for this reason, but this is not the only advantage of registering.
For example, owning a corporation can save you tax money, increase business agility, reduce your chances of being audited, provide tools for better granularity, and make capital raising less difficult.
Benefits of Corporations
- Limited Liability: A corporation is a legal entity that is separate from its owners or shareholders. With a few exceptions, shareholders are not responsible for the debts and obligations of the corporation or from any legal process where the corporation is the defendant. Some form of insurance may still be needed, but incorporation adds an extra layer of protection (also called a "corporate veil").
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Tax Savings: Careful planning of your business expenses can lead to lower overall tax rates. There are many tax incentives for running a business through the registration process, depending on your business income. Even if your fledgling business becomes profitable soon, the corporation is entitled to many deductions that are not yet available to you, resulting in significant tax savings. An example of such non-taxable expenses would be the salaries of your employees and yourself.
- Reduces the likelihood of IRS scrutiny (audit): Unrelated businesses, especially those with higher gross income levels, are subject to many IRS audits. Incorporated companies have a much lower level of audit, even if they have a high level of income.
- Anonymity: depending on the state of incorporation, a corporation can be created in such a way that shareholders / owners remain anonymous. Often times, this level of anonymity can be granted to officers and directors.
- More trust: The corporate structure links consistency and trust, even if it is a company with one shareholder and employee.
- Easier access to capital financing: With a corporation, it is much easier to attract investors through the sale of shares.
- Facilitate transfer of ownership: Title to a corporation can be transferred without material disruption to operations by selling shares. Thus, the need for complex legal documentation is reduced.
- Stock ownership flexibility: Owning stock gives you the flexibility you need to, among other things, leverage your business or retain key employees. To further capitalize on the business, a successful C-Corporation can be published in a process called an Initial Public Offer (IPO). You can also issue stocks or stock options to your key employees, "tying" them to the business and thereby preserving them (common in the tech industry and others).
- Longevity: The corporation is governed by the Board, not the owner. This means that the formation of a corporation can take longer than a company of its own, such as an LLC.
The main disadvantages of C-Corp.
C-Corporation have certain disadvantages. The main disadvantage is the fact that the profits of the C-Corporation are taxed by the corporation on earnings, and the corporation does not receive a tax deduction when distributing dividends to shareholders. Then, when the dividends are distributed to shareholders, they are taxed again at the shareholder level. This phenomenon is called "double taxation".
Likewise, when a C-Corporation has a loss, its shareholders cannot deduct it from their personal income.
