Table of Contents
- Limited liability: Shareholders of a C-Corp are not personally liable for the company’s debts and liabilities. This means that their personal assets are protected from business liabilities and lawsuits.
- Easy access to funding: C-Corps can issue stock to raise funds from investors. This allows them to raise money without incurring debt.
- Perpetual existence: A C-Corp continues to exist even if the ownership or management of the company changes. This makes it easier to transfer ownership or raise funds through the sale of shares.
- Tax benefits: C-Corps can deduct salaries, bonuses, and other expenses from their taxable income. Additionally, they may be eligible for certain tax credits and deductions.
- Brand recognition: C-Corps often have more credibility and brand recognition than other business structures, which can be important for attracting customers, investors, and business partners.
- Employee benefits: C-Corps can offer employees a range of benefits, such as health insurance, retirement plans, and stock options. This can help attract and retain talented employees.
Overall, an C-Corp can be an excellent choice for small business owners who want limited liability protection, easy access to funding, perpetual existence, tax benefits, brand recognition, and employee benefits. However, it’s important to consult with a business lawyer to determine if it’s is the best choice for your specific business needs and goals. That’s where we can help.
How Do You Form a C-Corporation?
A word of balance before the steps. The C-Corp is the right call for some businesses and the wrong one for many, and the deciding factor is usually how you plan to raise money and how you want to be taxed. If you are courting outside investors or venture capital, the C-Corp is often expected. If you are a small operating business keeping profits for yourself, its tax treatment can cost you. We help you weigh that honestly rather than default to the structure that sounds the most impressive, in a few easy steps:
- Obtain an EIN: An Employer Identification Number (EIN) is a unique nine-digit number that the IRS assigns to businesses for tax purposes. You will need an EIN to open a business bank account, pay taxes, and hire employees. In Pennsylvania, it’s advisable to include this in your certificate of organization, so we like to get this step done first.
- Choose a name: Choose a name for your C-Corp that is unique and not already in use by another business in your state. Let it speak to the nature and value proposition of the service or product you are offering. We can help you check the availability of your desired name through the Secretary of State’s office.
- Appoint a registered agent: Appoint a registered agent, who is someone responsible for receiving legal and tax documents on behalf of the C-Corp. The registered agent can be an individual or a company that is authorized to do business in your state. We go into this in more detail in a blog post on the subject.
- File articles of incorporation: Prepare and file articles of incorporation with the Secretary of State’s office. The articles of incorporation include the name of the company, the purpose of the company, the name and address of the registered agent, and the names and addresses of its members.
- Draft bylaws: Corporate bylaws are essential to outlining the ownership and management structure of the corporation, as well as the rights and responsibilities of its shareholders and directors. Corporate formalities are much more intense than LLC requirements, so it’s essential a lawyer help you do this.
- Obtain necessary licenses and permits: Depending on the nature of your business, you may need to obtain certain licenses and permits from state or local agencies before you can begin operating.
- Profit! Just kidding. You won’t be rolling in dough on day one, but you’ll have your business up and running with the credibility and legitimacy of businesses many times your size.
The process of forming a C-corporation can be complex, so get in touch with us today.
Management Structure
LLCs are typically managed by their owners, who are called members. Members have the flexibility to manage the company themselves, or they can appoint a manager to handle day-to-day operations. In contrast, corporations have a more structured management hierarchy, with a board of directors overseeing the company’s operations and making major decisions.
Taxation
LLCs are generally taxed as pass-through entities, which means that the profits and losses of the business are passed through to the individual members, who report them on their personal tax returns. Corporations, on the other hand, can be taxed as C corporations, which are subject to corporate income tax, or S corporations, which are also pass-through entities. The choice of taxation depends on the goals of the business and its owners.
Liability Protection
Both LLCs and corporations offer liability protection to their owners, but in slightly different ways. LLCs offer limited liability protection, which means that the personal assets of the members are typically protected from being used to satisfy the LLC’s debts and legal obligations. Corporations, on the other hand, offer more extensive liability protection, which means that the personal assets of the shareholders are typically protected from the debts and legal obligations of the corporation.
What Is a Registered Agent?
If you’re new to starting a business, you may be baffled at the concept of a registered agent. Not only is this poorly-named term almost never explained to fledgling entrepreneurs, there is little mention of it anywhere in society at large. Basically, a registered agent is a person who sits at a desk all day and waits for you to get sued. Say what?
Since the bureaucrats of the Commonwealth of Pennsylvania are never to be outdone for their creative use of language, in our jurisdiction a registered agent is called a “registered office” or “commercial registered office provider.” The Commonwealth wants to ensure that it’s possible for the public to contact the owners of a business if something goes wrong. If you operate a business, you are entering into the stream of commerce, and therefore must publicly avail yourself to be responsible for your actions. As tempting as it sounds, you can’t shield your business from legal liability by hiding its address. Although Kramer was able to stop his mail, I’m afraid you cannot.
So, the government requires all businesses to officially state where people should send a “service of process” should there be something wrong. This can be a lawsuit, a deposition, or any other legal proceeding. Furthermore, this address is used for official correspondence from the Commonwealth of Pennsylvania. They will send you correspondence for things like the annual report, certificates of good standing, and more. You can act as your own registered agent, but keep in mind if you do this, you will need to disclose an address publicly. For many people who work from home, this may be an unsavory idea. In those situations, a registered agent will help you maintain your anonymity.
Are There Any Downsides to C-Corps?
There are a few downsides associated with C-Corps that tend to scare away solopreneurs and small businesses but they can be easily overcome through the proper record keeping and due diligence.
Firstly, a corporation must have bylaws and a shareholders’ agreement in place. The bylaws will dictate the numerous legal formalities for the corporation, and the shareholders’ agreement will set forth the different rights and duties of the shareholders. The bylaws are governed by Pennsylvania’s Business Corporation Law of 1988, and they may not conflict with the corporation’s articles of incorporation or with Pennsylvania law. Where the bylaws intend to depart from a default rule the statute allows you to change, they should say so clearly.
Secondly, when shares of stock are created, it is essential to issue stock certificates or record them in a ledger. Ledgers have become more common than physical stock certificate as of late, as we’ve discussed on our blog. We’ve seen people mess this up in practice because they have trouble staying organized. Don’t let this happen to you. If you want to keep things as simple as possible, a C-Corp may not be the right choice for you.
Overall, we can’t emphasize this enough: formalities such as stock certificates and bylaws are mandatory when it comes to forming and managing a corporation. You must have them established to gain the liability protection of the entity. Failing to do so can expose the shareholders, officers and directors to personal liability.
What Is Double Taxation, and Does It Apply to You?
Double taxation is the trade-off at the heart of the C-Corp, and it is worth understanding before you choose one. A C-Corp pays corporate income tax on its profits. Then, when those profits are distributed to shareholders as dividends, the shareholders pay tax again on what they receive. The same dollar is taxed at the company level and again at the personal level, which is the cost that pushes many small businesses toward an LLC or an S-Corp election instead.
It does not sink every C-Corp. Businesses that reinvest profits rather than distribute them, or that are raising money from investors who expect the C-Corp structure, often find the benefits outweigh it. The point is to go in with eyes open. We model how the tax actually lands for your plans, so the structure is a decision you made rather than one you discover at tax time.
C-Corp Formation FAQs
Do I need a C-Corp to raise money from investors?
Often, yes. Venture capital firms and many institutional investors expect a C-Corp, because it issues stock cleanly and supports the ownership structures they use. If raising outside capital is your near-term plan, the C-Corp is usually the right home for it. If it is not, you may be taking on the structure’s costs without needing its benefits, and we will tell you so.
What is the difference between a C-Corp and an S-Corp?
They are the same kind of entity taxed two different ways. A C-Corp is taxed at the corporate level and again on dividends, while an S-Corp passes income through to the owners and avoids that second layer, subject to eligibility rules. Which one fits depends on your investors, your income, and your plans, and we help you choose with the full comparison in front of you.
Is a C-Corp worth the extra formalities for a small business?
Sometimes, but the formalities are real and non-optional. A corporation needs bylaws, stock records, and proper meetings, and skipping them can put your liability protection at risk. For a small business not seeking investors, an LLC often delivers the protection with less upkeep. We help you decide which trade-off you actually want to make.
Contact a Philadelphia Business Lawyer For a Free Consultation
There’s so much more we want to tell you about forming a business if you’ll give us the opportunity! If you’re ready to receive experienced business law formation advice, don’t hesitate to reach out today. We can’t wait to meet you.
