One important decision a company needs to make when starting a business is to choose a legal entity structure. Aside from the impact it has on the tax treatment, it will also determine the paperwork, fees, and obligations of the company.
Choosing C Corporation
Starting a traditional corporation, which is also known as C corporation or C corp, comes with many advantages. Generally, it is an entity type owned by shareholders. They have asset protection, which means they will not have personal liability for the actions of the company.
The shareholders will appoint members to the company’s board of directors. Then, the board of directors will elect the officers. In some cases, the owners can be directors and officers as well. However, officers and directors need not be shareholders.
Business Types Suitable For C Corporation Structure
The features of the C Corporation structure make it an appealing option for many entrepreneurs. However, it is not for every type of business. Here are 7 kinds of business that can be great for C corp registration:
- Large companies – Since there is no limit as to the number of shareholders a C corporation can have, larger companies can choose this structure. In doing so, they can add shareholders in case they choose to raise more capital or expand their operations.
- Companies with foreign shareholders – Shareholders of C corps do not need to be United States citizens. Companies with foreign owners may benefit more if they choose to register as C corporations.
- Those owned by another company, such as an LLC, trust, or corporation – C corps can be owned by another company. Because of that, it may be a good option for a company with a shareholder that is not a natural person.
- Business entities with multiple types of shareholders – C corps offer flexibility when it comes to ownership, so they can have various types of shareholders. It does not matter whether the shareholders are individuals or entities and if they are domestic or foreign. Other businesses can own shares in a C corporation. Additionally, corporate stocks can be held in a partnership, trust, or any other legal tool. To put it simply, anyone and anything can become a C corporation shareholder.
- Companies that are going public – Most publicly traded companies are C corporations. That is because this type of business entity structure does not limit the number of shareholders. C corps can also issue common stocks with fewer voting rights. Common stocks let shareholders vote on various corporate issues, such as the appointment of the members of the board of directors or acceptance of takeover bids. In most cases, the shareholders receive one vote per share.
- Companies looking for venture capital or equity investors – Similar to publicly traded companies, business entities looking for venture capital or equity investors usually choose to form as a C corporation. That way, they can avoid limitations on the number of shareholders and have control over the shareholder voting rights. Most venture capitalists choose to invest in C corporations because the structure allows them to create preferred shares of stock. Generally, preferred shares or stocks are those with dividends that the company pays out to shareholders before issuing common stock dividends. In most cases, preferred shares have a fixed dividend. Shareholders with preferred shares usually do not have voting rights.
- Companies that want to give equity to their employees – It is easier to reserve shares that will be distributed to employees later if the company structure is a C corporation. In an LLC, the members own 100% of the company, so it is necessary to make an employee a member before the company can give them equity. In the C corp, that is not necessary.
Setting Up A C Corp
Once a company realizes that a C corporation structure is right for its business, it will have to ensure the proper registration with the state. That means it needs to complete the incorporation process set by the state where it plans on organizing the company.
- Choose the state that best fits the company’s needs. Each state has different laws governing business entities. That means the tax and reporting obligations may also vary. While some entrepreneurs choose to form their C corps in their place of residency, others choose the state that they think has the best regulations.
- Select an appropriate company name. States require the inclusion of a proper designator, which can be “Corporation,” “Incorporated,” “Limited,” or any of their abbreviations like “Corp.,” “Inc.,” or “Ltd.” It is also necessary to ensure the distinguishability of the company name. If another entity in the state is already using it, the company will have to come up with another business name.
- Appoint the members of the board of directors. The board of directors of a C corporation will be in charge of governing the business operations and will represent the interests of shareholders. They are also the ones who will make big decisions for the C corporation.
- Select the type of shares the company will be issuing. The directors will have to determine whether the company will be issuing common or preferred shares of stock.
- Nominate a registered agent. All states require business entities to designate and maintain a registered agent.
- File formal paperwork. The formal registration of the company will only be finalized after successfully filing the formation documents with the governing agency. In most states, this form is known as the Articles of Incorporation. It comes with a filing fee.
- Establish the corporation’s bylaws and issue stocks. The board of directors will have to adopt a set of bylaws that will serve as the rules by which the C corporation will run. At the same time, they should start issuing stocks.
Completing the process of incorporation requires the handling of multiple tasks and steps. For some entrepreneurs, doing so can be a bit overwhelming. Add to that the need to conduct research to prevent any mistakes. In such cases, the best option for a company is to hire a reliable third-party organization like DoMyLLC. Talk to us now and find out how our services can help companies.