What is a C Corporation?

 

A C corporation is an independent legal entity owned by its shareholders. Shareholders of a corporation have “limited liability,” which means that the corporation itself, and not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Shareholders do not typically actively manage a corporation; shareholders instead elect or appoint a board of directors to control the corporation in a fiduciary capacity.

 

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

 

How is a C corporation incorporated?

 

A corporation is formed under the laws of the state in which it is registered. The following describes the steps in Delaware and New York to form a C corporation.

 

1.  Choose an appropriate name for the corporation. The corporation's name must be recognizably different from (not deceptively similar to) the names of other business entities already on file with the state.

 

  • In Delaware, a corporation's name must include the word "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate," or "limited" (or an abbreviation thereof, with or without punctuation). 

 

  • In New York, a corporation's name must include the word "Incorporation," "Incorporated," or "Limited," or an abbreviation.

 

2.   Prepare and File Certificate of Incorporation

 

  • In Delaware, a C corporation is created by filing a Certificate of Incorporation with the Delaware Secretary of State. The certificate must include the corporate name and address; its purpose; the name and address of an agent for service of process; the number of shares the corporation is authorized to issue; and the name and address of the incorporator. The certificate must be filed by postal mail or fax. There are filing fees applicable to these filings.

 

  • In New York, a C corporation is created by filing a Certificate of Incorporation with the New York Secretary of State. The certificate must include the: corporate name and county in which main office is located; street address; number of shares the corporation is authorized to issue; name and address of incorporator. The certificate may be filed on-line or by mail. There are filing fees applicable to these filings.

 

3.   Appoint a Registered Agent

 

  • In Delaware, each corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. The agent should agree to accept service of process on the corporation's behalf prior to designation. The agent may be (1) an individual Delaware resident, or (2) a business entity authorized to do business in Delaware. The registered agent must have a physical street address in Delaware. However, if a corporation is physically located in Delaware, it may act as its own registered agent. 

 

  • In New York, every corporation must appoint the New York Department of State as its registered agent for service of process in the state. The New York Department of State will accept and forward legal papers on the corporation's behalf if the corporation is sued.

 

4.   Establish and Maintain A Corporate Records Book

 

  • Each corporation should organize corporate records book, including minutes of director and shareholder meetings, stock certificates, and stock certificate stubs. The corporate records book should be kept and maintained at the principal office of the corporation. 

 

5.   Prepare Corporate Bylaws

 

  • Bylaws are an internal corporate document that set out the basic ground rules for operating a corporation. They are not filed with the state. 

 

6.   Appoint Initial Corporate Directors

 

  • The incorporator of the corporation, who is the person who filed the certificate of incorporation with the state, must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.

 

7.   Hold First Board of Directors Meeting

 

  • The first meeting of the corporation's board of directors should be held at which the directors can appoint corporate officers, adopt bylaws, select a corporate bank, authorize issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors' actions must be recorded in corporate minutes prepared by the incorporator or any of the directors. 

 

8.   Issue Stock

 

  • The corporation must issue stock to each shareholder. Each shareholder's name and contact information must be duly entered into the corporation’s stock transfer ledger.

 

9.   Comply with State Reporting Requirements and Franchise Tax Requirements

 

  • All corporations incorporated in Delaware must file an annual report online and pay a franchise tax with the Delaware Division of Corporations no later than March 1st of each year. Foreign corporations are required to file an annual report by June 30 each year. The minimum franchise tax is $75 with a maximum tax of $180,000. Corporations owing $5,000 or more pay estimated taxes in quarterly installments with 40% due June 1; 20% due by September 1; 20% due by December 1; and the remainder due March 1. Failure to file the annual report and/or pay the franchise tax will attract penalties and interest.

 

  • All corporations incorporated or doing business in New York must file a Biennial Statement with the Department of State every other year. The statement is due during the calendar month in which the corporation's original certificate of incorporation was filed. New York State Tax Law requires a corporation to file franchise tax reports and pay franchise taxes annually even if the corporation does not conduct business or loses money. Franchise tax requirements begin the date the corporate existence begins and continue until the corporation is legally dissolved by the Secretary of State.

 

10.  Comply With Other Tax and Regulatory Requirements

 

  • EIN: Every C corporation must obtain a federal employer identification number (EIN). An EIN can be obtained by completing an online application on the IRS website. There is no filing fee.

 

  • Business Licenses: Depending on its type of business and where it is located, a corporation may need to obtain other local and state business licenses.

 

11.  Foreign Corporations Doing Business in the State

 

  • All corporations organized outside of Delaware (and doing business in Delaware) must register with the Delaware Secretary of State to do business in Delaware. Foreign corporations must appoint a registered agent for service of process physically located in Delaware. To register, a corporation must file the State of Delaware Qualification Certificate of a Foreign Corporation. The completed certificate must be accompanied by a Certificate of Existence, dated within 6 months prior to the filing of the certificate, from the foreign corporation's home state.

 

  • All corporations organized outside of New York must register with the New York Secretary of State to do business in New York. Foreign corporations must appoint the New York Department of State as its registered agent for service of process in the state. To register to do business as a foreign corporation, a foreign corporation must file an Application for Authority. The application must be accompanied by an original certificate of good standing or existence, no more than one year old, from the Secretary of State or similar official of the foreign corporation's home state. The form may be filed online, or by mail. There are filing fees applicable to this filing.

 

How are corporations taxed?

 

Corporations are required to pay federal, state, and in some cases, local taxes. Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice, in a manner of speaking - first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Shareholders who are also employees pay income tax on their wages. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense. You can find more about tax requirements for corporations on www.IRS.gov.

 

What are the advantages of a corporation?

 

  • Limited Liability. The shareholders of a C Corporation have limited liability and are not personally responsible for the debts and actions of a corporation. Accordingly, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.

 

  • Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business - the ability to raise funds through the sale of stock.

 

  • Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.

 

  • Attractive to Potential Employees. Well established and well run corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

 

What are the disadvantages of a corporation?

 

  • Expensive. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.

 

  • Double Taxation. In some cases, corporations are taxed twice in a manner of speaking - first, when the company makes a profit, and again when dividends are paid to shareholders in the form of personal income taxes paid by the shareholders.

 

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