Owning a business is part of the classic American dream.
That doesn’t mean business owners should leave their personal assets at risk while building up. Incorporation protects the owner(s) by making the corporation a separate entity from the owners, and usually falls into one of three types: LLC, S Corporation, and C corporation.
C corporations, or standard corporations, must be owned by shareholders and run by a board of directors. The board of directors then elects a president to manage the company’s daily business.
A C corporation must follow certain practices in order to maintain their status. Stockholders meetings must be held at least annually, and minutes must be taken at each meeting. Officers must be properly elected, usually the aforementioned president, a secretary, and a treasurer. Stock must be issued to all shareholders, including the owners that formed the corporation. The corporation must also keep enough capital on hand to cover potential debts, or risk being viewed as a sham corporation when sued, which removes the liability protection provided by incorporation.
Some states also require a C corporation to write a company charter and/or bylaws, dictating the structure and policies of the company, and the range of situations that can arise is enormous.
There are some other disadvantages to a C corporation in addition to the required hoop-jumping. The most notable is that profit is taxed twice: once when brought in by the company, and once when profits are issued to shareholders as dividends. This can be avoided by incorporating as an S corporation, but S corporations come with shareholder restrictions.
There’s also a high cost to forming and operating a C corporation, from filing fees and legal fees required when conducting business across state borders. C corporations often need to hire lawyers to navigate all these legal hurdles.
There are advantages to forming a C corporation, or they wouldn’t exist in the first place.
Because of the ability to issue shares, it is easier to acquire capital to grow the business. Bank loans come with interest, and some banks avoid the risk that comes with a recently opened business, but some investors are willing to gamble on a company’s success in exchange for a share of future profits.
C corporations also exist in perpetuity, only dissolving after shareholders vote on the action. The business will continue on, guided by the company bylaws, regardless of ownership or leadership changes.
C corporations are also eligible for extra tax breaks on certain employee benefits, like medical costs not cover by insurance, allowing for more income to be sheltered from taxation.
An unincorporated business, since it does not exist as a separate entity, is difficult to directly pass on to a new owner or to heirs, but shares are easily transferred via sale, gift, or will.
Every situation is different. Many small businesses choose to incorporate as an LLC, and an S corporation if effective, but a C corporation is a better long-term solution if a company has the potential to grow into a large corporation.