If you have an unofficial business in CA but want to make it official to attract investors, forming a corporation may be the way to go. As a corporation, you can also offer shares in the future to raise capital. But which type of corporation is best suited for you and your business?
At Bay Legal, PC, our business attorney in California will help you explore the types of entities that may work best for your business. For many businesses like yours, a C corporation may post the best opportunities. We will help you identify the benefits and the risks so that you make smart decisions for your business. Contact us today at 650-374-7900 to schedule a Consultation and get started on a plan to set your business up for growth and overall success.
What is a C Corporation?
A C corporation, or C corp, is a business structure with a separate legal identity from its owners.
A C corp is created by filing articles of incorporation with the relevant government organization. The owners of a C corp are shareholders, who hold a percentage interest in the business typically proportionate to their investment. Shareholders elect a board of directors who oversee operations and choose officers to manage the day-to-day affairs of the business.
One of the most attractive features of a C corp is that it protects shareholders' personal assets from the corporation's creditors. In the event of bankruptcy or a lawsuit against the corporation, the owners cannot be held personally liable.
When it comes to taxation, C corps are taxed at the entity level, paying federal corporate income tax on their profits. Shareholders receive distributions of these business profits, usually as dividends. Shareholders also pay tax on this personal income at the individual rate.
A C corp is the most common type of corporate tax status in the United States.
C Corporations vs. S Corporations
Some C corps elect to become S corporations, a special tax status. There are some essential differences between C and S corps that you should know before selecting one over the other.
- S corps do not pay federal income tax at the entity level, avoiding double taxation.
- S corps cannot have more than 100 shareholders.
- S corps must meet certain eligibility criteria, e.g., it must be a domestic corporation or the shareholders must be U.S. citizens.
- S corps can only have one class of stock.
You should seek advice on whether a C corp or S corp is better suited for your business.
Advantages of a C Corp in CA
Many advantages flow from a C Corp structure. Knowing them will help you understand if your business is best suited for this type of business entity.
- Limited liability. As the corporation is a separate legal entity that can sue and be sued, own property and other assets, and take out loans, its shareholders' personal liability is limited to the amount of their investment. This protects their personal assets from any business debts or liabilities in the event the corporation files for bankruptcy or undergoes litigation.
- Flexible ownership and management. C corp ownership can change through the buying and selling of shares. The management of a C corp can also be easily changed. This flexibility ensures the survival of the business, meaning it can continue to operate seamlessly after an owner or manager is terminated, resigns, or otherwise leaves the company.
- Large fundraising potential. Unlike an S corporation, a C corp can have an unlimited number of shareholders. This allows C corps to raise large amounts of capital through, for example, an initial public offering.
- No shareholder restrictions. Unlike an S corporation, there are no limits on who can hold shares in a C corporation. For example, shareholders in a C corporation do not need to be US citizens. C corporations can also issue more than one class of stock, an attractive feature to potential investors.
Before setting up a C corp, it's crucial to balance these pros against the potential cons. A corporation lawyer can help you align your company's goals with the advantages and identify how any disadvantage can be strategically addressed.
Disadvantages of a C Corp in CA
Several disadvantages of a C corporation can impact your business. Three of the main disadvantages associated with C corps are described below.
- Double taxation. A C corp pays federal income tax on its profits at the entity level. Shareholders are also taxed on any dividends they receive from the business at a personal rate.
- Increased regulations and oversight. C corporations require onerous record-keeping and reporting obligations. Annual shareholder meetings must be conducted regularly, and minutes of these meetings must be recorded. Details of the division of ownership and the director's voting records must also be recorded. They also involve complicated tax arrangements.
- More costly to set up and run. Businesses are typically required to pay a filing fee when registering a C corp. They may also be required to pay additional annual state-based fees. Due to the complex regulatory environment in which C corporations operate, they typically engage attorneys and accountants to ensure compliance with federal and state laws.
Before deciding to incorporate, it's worth speaking to a corporate lawyer to understand the advantages and disadvantages relevant to your situation.
What Types of Businesses in CA Are Best Suited as C Corporations?
Not all businesses prosper or succeed as a C corporation. The C corp structure typically suits businesses that:
- Require venture capital
- Seek to own real estate
- Want to reinvest earnings into the business to fund growth
- Want to ensure flexible profit-sharing among the owners
Examples of well-known C corporations include:
- Apple
- MacDonald's
- Target
- Microsoft
- Starbucks
These are all large corporations. C corporations are not always suitable for small businesses. If your business is not so large, you want to consider the following:
- Do you need or intend to live off the profits made via your business? If so, keep in mind that under a C corporation, profits are essentially taxed twice, so a pass-through entity like an S corporation or a limited liability company (LLC) might be the better choice.
- Do you plan to keep your business forever? If you do not plan to sell your business, a C corporation may not be a good option for various reasons. On the other hand, if you intend to sell, say after five years of operation, a C corporation can be advantageous upon cashing out.
- Do you want to keep your business operations simple? If so, as demonstrated above, keep in mind that C corps demand more paperwork, recordkeeping, and regulatory compliance.
- Does personal liability matter a lot to you? If so, C corps are good, but there are also other options, like forming an S corp and an LLC.
So, as in everything related to business formation and operations, speaking to a corporate attorney will be in your best interests so you can make sure you are acting in the most advantageous and strategic way.
Contact a Corporate Lawyer in California Today
If you are thinking about incorporating a business as a C corporation, our business law lawyer in CA can help you make sure you choose the right structure to form your business. C corporations offer many benefits, but there are important factors to consider, especially because there may be better options for your business needs.
Book a consultation with an attorney to discuss your entity requirements and solutions.
Contact Bay Legal, PC today by either filling out the online form or calling us at 650-374-7900 to schedule a Consultation.
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C-Corp requirements
- Use your corporate name on all legal documents
- Annual tax filing – IRS form 1120S
- Record annual minutes
- Must maintain “Corporate veil”
- Separate accounts (everything)
- Bookkeeping