C Corporation

A C corporation is a form of business that is completely separate from the owners and managers. It has a "life of its own." A major advantage to a corporation is that, in most instances, individual owners (shareholders), directors and employees do not assume personal liability for its actions.

Some important features of a corporation include the following:

• A corporation is state-chartered based on where its headquarters are located.
• A corporation has a perpetual life and ceases to exist only when it is formally dissolved.
• The corporation is owned by the shareholders, who elect the board of directors.
• The board directs corporate strategies and policies. The board also elects the corporate officers (president, vice president, secretary and treasurer).

What does a "controlling interest" mean?

The percent of stock owned by a shareholder governs the amount of voting power he or she has. The vote of a shareholder who owns more than half the stock (51 percent) will be able to control the outcome of any ballot, so that shareholder is considered to have a controlling interest.

How many shareholders are needed to form a corporation?

Only one shareholder is required, and one person can comprise the board of directors and all corporate officers.

Forming a C Corporation

Forming a C corporation calls for meeting requirements set forth by your state. An Internet search under "[your state name] Secretary of State" should lead you to the forms you will need.

Steps that you will take to incorporate include:

• File the forms for your state's articles of incorporation and pay the incorporation fee.
• Establish corporate bylaws and maintain a minute book to record board of directors' meetings and the corporation's annual meeting.
• Distribute stock certificates to shareholders.

Once you have incorporated, you will be required to hold an annual shareholder meeting, file an annual report with your secretary of state and pay any required annual fees.

What information will I need to file articles of incorporation?

The forms will ask you to list the business's official corporate name and the purpose of the business, the name and address of the registered agent and details of share ownership.

How do I decide on a corporate name?

This is an important decision. To avoid potential legal problems, you must avoid choosing a name that duplicates or can be considered too close to a name used by an existing business. Your state will make sure that you do not duplicate a name that is registered with the state, but you may want to do a national search for an identical or nearly identical name, especially if you intend to do business outside of your state.

You will also want to make sure that the business name includes the words "corporation," "company," "incorporated," "limited" or an abbreviation of those words.

What is a "registered agent"?

A registered agent is a person or entity who will receive tax and legal documents for the corporation. This can be a manager or shareholder of the company, or there are services that will handle the function for a fee. The registered agent must have a legal address within the state or jurisdiction that the registration covers. The corporation may be invalidated if the registered agent is not maintained.

What about raising capital for a corporation?

Like a proprietorship or partnership, a corporation can borrow money from a bank or other lender. But it can also raise funds by selling stock to shareholders. This money becomes a permanent part of the company's resources and does not have to be repaid as a loan does.

Ongoing Legal Requirements for a Corporation

One of the continuing duties of a corporation is to maintain business and accounting records. It will need to keep the following at its home office:

• articles of incorporation and bylaws and any amendments that are up-to-date;
• any resolutions adopted by the board;
• copies of written messages to shareholders, including financial statements that are required for shareholders;
• names and addresses of directors and officers; and
• the annual report most recently filed with the secretary of state.

Tax Aspects of a C Corporation

One of the drawbacks to the owners of a C corporation is the potential for income to be taxed twice-first as a corporation and second as a shareholder.

This can happen because the C corporation files its own tax returns as a stand-alone entity and pays any taxes that are due. The corporation then pays after-tax profits to shareholders in the form of dividends, and the shareholders will most likely have to pay personal income tax on the dividend money.

Is there any way to avoid double taxation?

If the shareholder is also an employee, the company can pay the shareholder-employee a salary, as long as it is considered a reasonable amount. The corporation can deduct the salary as a business expense so that it is taxed only once (as income by the employee).

Another option is to elect Subchapter S status if the business qualifies.

Shareholder Liability

As a shareholder, you are not liable for the debts and liabilities of a corporation. Generally, you are not risking your personal assets. You may, however, lose the amount of your investment if the corporation is not profitable or ceases to stay in business.

You may also be at risk if you personally guarantee a debt of the business. Also, if the corporation does not follow legal requirements or if corporate and personal funds are commingled, you might be liable.

Can directors be held liable for issues that relate to their service to the corporation?

Yes, directors, as well as corporate officers or employees, can be considered liable. This can be a problem in attracting directors or employees with the needed expertise. Companies can purchase insurance that will provide compensation for losses sustained due to actions of the directors and employees while they are performing their responsibilities to the corporation.

In addition, depending on the nature of the business, the corporation's leaders must be sure that insurance is sufficient to protect the corporation from losses due to property damage or personal injury.

What if I want to close my corporation?

You need to gain shareholder approval and file a notice with the secretary of state. After taxes and other debts are paid, any remaining assets are distributed to shareholders.