Heads up: this article is only relevant for U.S. businesses.
Not to be confused with an S corporation, the C corporation is the standard corporation business structure.
In this article, we’ll explain the form and function, and the pros and cons of the C corporation business structure. We’ll also explain the steps you need to take in order to incorporate.
Understanding the corporation business structure
In a legal sense, corporations are separate entities that can sue and be sued. When it comes to paying tax, corporations are considered to be separate taxpayers, and they pay tax at special corporate tax rates that are different to, and often more appealing than, individual tax rates.
The supervision of a corporation is made up of three different components: the shareholders, the board of directors, and management. Depending on the size of the company, one person or a few people may be owners and also hold management positions.
Ownership of the corporation is represented by the holding of company stock and those who own that stock are referred to as shareholders. Corporations are divided into publicly held and privately held companies; publicly held companies sell shares to the general public, and they are required to disclose financial information, whereas privately held companies are not.
Shareholders are responsible for electing a board of directors, which will then appoint and oversee the management of the corporation.
Management includes the CEO, and potentially a president, a chief operations officer (COO), and a chief financial officer (CFO).
Advantages of the corporation business structure
Additional legal protection and access to corporate tax rates are some of the more popular reasons entrepreneurs choose to incorporate their business. Let’s take a closer look at the benefits of the C corporation business structure.
Ability to raise capital
One significant advantage of the corporation is that shareholders are able to raise capital for the company by selling equity to investors. This gives the owners of a corporation an advantage over other structures when it comes to raising large amounts of capital, since purchasing stock is a well-understood form of investment to make.
Many entrepreneurs elect to form a corporation because of the liability protection that the structure provides. Tax burdens and debts remain with the company and are not able to cross over to the owner’s personal finances. For instance, if the business is sued, only the assets of the company are liable to be seized. The only instance in which this liability protection can be lost is when there is an inadequate distinction between the owners of a corporation and the corporation itself. This is known as piercing the corporate veil.
Long life expectancy
As opposed to the relatively short life expectancy of the LLC, the corporate structure enjoys a more perpetual existence. Corporations exist as separate legal entities, and therefore they don’t automatically dissolve when an owner leaves. Shareholders are able to leave by selling off their shares and not affect the longevity of the company. This is beneficial because companies don’t end when one person decides to move on; the perpetual existence of the corporate structure allows for more long-term stability.
Disadvantages of the corporation business structure
Although the corporation business structure is ideal for many businesses, it does come with a few drawbacks.
It’s expensive to incorporate
Compared to other business structures, it’s expensive to start and run a corporation. Depending on how the company is set up, it could potentially cost thousands of dollars to get a corporation started, in addition to the ongoing fees required to maintain a corporation. The ongoing fees vary by state, and are necessary for maintaining good business standing.
Increased regulations and paperwork
There are extensive federal, state, and sometimes local regulations to abide by. The high level of regulation leads to heavy paperwork burdens and the upkeep of additional tax, business, and monetary records.
The downside of corporations existing as separate tax entities is that they are subject to double taxation. After a company’s profits are taxed at the corporate level, they are paid out to shareholders who are required to report the amount they received on their individual tax returns.
How to form a corporation
Here are the steps you’ll need to take in order to form a corporation:
- Choose a business name that is available and that adheres to corporate naming rules set out by your state
- Appoint the directors of the corporation
- Register your corporation by filing articles of incorporation. You’ll need to pay the filing fee for the paperwork—the fee ranges from $100 to $800 depending on the state that you incorporate in
- Issue stock to the initial shareholders of the corporation
- Obtain the necessary licenses and permits for your business
Clearing up the differences between business structures allows you to make informed choices about what will best suit your business. The corporation business structure is beneficial in multiple ways, and could very well be the right choice for you and your business.