As a small business owner, you’ve probably heard a bunch of different terminology when it comes to legally structuring your business. One example being a “C corporation” or “C corp”. So, what is a C corp and how do you open one? And what are the differences between a C corp and other types of corporations? Keep reading to find out!
What is a C corp?
“C corp” describes a type of corporation where the business itself is taxed separately from its shareholders. When you hear the term “corporate taxes,” this is what it relates to. It’s as if the corporation is a person for the purposes of the IRS. This is one of the primary differences between a C corp and an S corp.
When tax time comes, C corps pay taxes on their earnings. Then, the remaining earnings are passed on to the shareholders. This is called “paying dividends.” Each of the shareholders then pays tax on the amount they receive as part of their regular income.
That means the money earned as a C corp is double taxed: once at the corporate level and again at the shareholder level. Still, forming a C corp has its benefits. Take some time to research C corps and S Corps to see which is best for your small business.
How to become a C corp in (7 steps)
Forming a C corp is easy when you follow these steps.
1. Choose a legal name for your C corp
Remember, the name you choose must not already be claimed by another business. Check with the appropriate state agency first to ensure your name is unique before registering it.
2. Choose a registered agent
This is the person that officially handles all your paperwork.
3. Appoint directors.
Your Board of Directors are the people who actually manage the corporation, so choose carefully!
4. File your articles of incorporation
This is done with an agency of your state government. This is when your C corp really becomes official.
5. Hold a meeting with the Board
One of the requirements of a C corporation is holding formal meetings. In the first meeting, you should adopt bylaws and start the process of issuing stock.
6. Issue stock
This is when shareholders can become part owners of the company.
7. Obtain any permits, licenses, and an employer identification number.
These allow your business to legally hire employees, start working, and earn money.
Benefits of a C corp
It’s important to remember that your business needs may change over time. For example, when you’re first starting out, structuring your small business as an LLC may be the best route. However, as your business grows, a C corporation structure has more appealing benefits.
One of the biggest draws of a C corporation is the protection it provides to its shareholders’ personal assets. For example, if there were ever an issue with creditors, they could come after the assets of the business, but not the personal assets of its shareholders.
Another advantage of filing as a C corporation is investor appeal. Venture capitalists often prefer dealing with C corps over LLCs or S corps, so it can be easier to raise the funds your business needs to grow.
The main reason business owners choose to file as a C corp is taxes. If a C corporation chooses to reinvest its profits back into the business, it can do so tax free. Many businesses choose to go this route to upgrade equipment and purchase any necessary supplies.
What to do after opening a C corp
Once your C corporation is officially registered, it’s time to start managing the company’s money. Because a C corp structure comes with tax advantages, it’s especially important to keep the books accurate. Check out our bookkeeping guide to ensure you’re capturing all the information you need.
It’s also important to take the time to evaluate your expenses and understand where your money will be spent. Create a budget by projecting costs to ensure you have enough money to continue operating and growing your business without falling into debt.
Finally, it’s essential to open a dedicated bank account for your business. When you’re looking for a banking partner, you’ll want to find one that’s committed to helping small businesses grow and thrive. Our specialized business bank account is simple to use, making it easy to keep tabs on your business finances.
What’s the difference between a C corp and an S corp?
One of the biggest differences between a C corp and an S corp is in the number of shareholders. S corps are limited to 100 shareholders or less while C corps can have an unlimited number of shareholders.
Taxes are another huge difference. S corps don’t pay double tax. The earnings the company makes go directly to the shareholders and they pay tax on it. With C corporations, the company itself pays taxes, then the money the shareholders earn is taxed again.
Is my LLC an S or C corp?
An LLC is a different type of business entity, known as a “partnership.” So, an LLC can’t be an S or C Corp. Forming an LLC has some great benefits. It’s up to you to decide what’s best for your business. Remember, you can change business structures in the future.
Should I start an LLC or a C corp?
LLCs are a great choice for businesses that are smaller and want to separate their business and personal expenses. If you want to retain complete ownership and control of your company, you’ll want to stick with an LLC. C corporations are owned by shareholders, so the control is in the hands of a Board of Directors.
Both types of businesses have their benefits. After doing some research and planning, you’ll be able to make the best choice for the future of your company.
While C corporations have many great benefits, they could be better suited for some companies than others. Take the time to understand all the options available to you and consider what best aligns with your business goals.