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C corporation

Issue multiple classes of stock and protect shareholder assets with a C-corp.
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Greg H. | Owner, Homecare California
Incorporated using Rocket Lawyer in 2013

How to form a C corporation

Start a C corporation online with fast, personalized support.

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Answer a few simple questions.

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We reserve your business name and take care of your filing.

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Choose a business structure

Compare the advantages and disadvantages of each entity type to find the one that's best for your business.

LLC

S-corp

C-corp

Nonprofit

Sole proprietorship

Managing your business

Limited liability

Incorporation can protect business owners and shareholders from personal financial responsibility for business debts or liability.

Members are protected

Shareholders are protected

Shareholders are protected

Directors are protected

Sole proprietors are not protected

Management flexibility

Some entities are more rigid than others when it comes to structure.

Variety of management structures

Defined by state and federal law

Defined by state and federal law

Strict management laws

No management structure

Favorable for financing

Depending on your goals, certain entity types may be more suitable.

Gains credibility when applying for loans and grants

Can distribute one class of stock to up to 100 people

Can issue multiple classes of stock to unlimited shareholders

Gains credibility when applying for loans and grants

Often more difficult to get loans and cannot issue stock

Maintenance

Compliance requirements vary by state and entity type

Easy to maintain and often most affordable

Payroll requirements may create operational overhead

Requires more complex accounting and potentially more reporting and fees

Typically the most demanding due to tax-exempt status

No requirements or fees

Unlimited lifetime

Succession planning may be important to you. If so, you'll need a business structure that enables a smooth transition.

With the proper planning, LLCs can exist for generations

Existence is not tied to specific shareholders

Existence is not tied to specific shareholders

Existence is not tied to specific directors

No longer exists when the owner quits or passes away

Tax considerations

Tax treatment

Your choice of entity can impact your tax rate and filing options.

Pass-through taxes: Most often, LLC members are taxed on their personal tax returns

Pass-through taxes: S-corp shareholders are taxed on their personal tax returns

Double taxation: C-corp income is taxed at the corporate level first, then again at the personal level

Nonprofits can apply for tax-exempt status and donations are tax-deductible

Sole proprietorships are taxed only on their owner's tax return.

Formation fees

State filing fees are required for all legal entities. As a Rocket Lawyer member, you only pay state fees.

Fees are tax-deductible

Fees are tax-deductible

Fees are tax-deductible

Fees are tax-deductible

No fees

C-corp FAQs

  • What is a C corporation?

    A C-corp is a subset of the corporation business entity type. Corporations provide a common and well-known legal structure for businesses and offer their shareholders some limited liability. Except for certain instances of fraud or malfeasance, a shareholder is not liable for the debts or obligations of a corporation beyond the shareholder's investment into the corporation.

    A C-corp specifically is a corporation taxed under Subchapter C of the U.S. Code. It is subject to double taxation (at the corporate and individual level), but allows for anyone to be an investor. C-corps also allow for an unlimited number of shareholders and multiple share classes.

  • S-corp vs. C-corp: What is the difference?

    There is no practical difference between an S-corp and a C-corp from the perspective of shielding a company's shareholders from liability. Both are simply corporations offering limited liability protection to their shareholders. The corporate governance procedures are also very similar. Both require bylaws and articles of incorporation, as well as annual shareholder meetings, for example. The major practical difference between them, besides certain qualifications a company must have to be treated as an S-corp, comes from the IRS's tax treatment of each. C-corps are subject to double taxation, while S-corps, much like limited liability companies, are pass-through entities.

  • How is a C-corp taxed?

    A C-corp is its own separate entity for tax purposes. It files and pays its own taxes on any income remaining after accounting for offsetting expenses, credits, and deductions. The income tax rate that a corporation pays is usually different than what an individual pays.

    After the C-corp pays taxes, the remaining income can either be kept within the company as retained earnings and used to fund future growth or it can be distributed to the shareholders in the form of a dividend. Any amount distributed to shareholders is subject to being taxed again though, this time as the income of the shareholder. This is what is known as double taxation.

  • What is double taxation?

    C corporations are subject to double taxation. That means that, for tax purposes, the C-corp is its own separate legal entity that must pay its own income taxes as they come due. Then income taxes must be paid again, this time by each individual shareholder, when dividends are paid out to the shareholders.

    It is important to note, however, that the second layer of taxes is only paid when a dividend is actually made to the shareholders. Compare this to an S-corp, which is a pass-through entity and pays income on the profit of the company, whether or not shareholders receive a payment. So while both layers of a double taxation system may add up to more than what a pass-through entity would pay, the second layer of taxes can sometimes be postponed indefinitely by reinvesting the pre-tax retained earnings of a C-corp.

  • Who can be a shareholder of a C corporation?

    Unlike some other business structures, any U.S citizen, non-citizen, or company can be a shareholder of a C corporation. There are differences, however, in how taxes are handled.

    Non-citizens who reside in the U.S. are taxed in generally the same way as a U.S. citizen. They must report and pay taxes on their income earned worldwide. Non-citizens who are also non-residents are not subject to this requirement. Non-resident aliens, individuals who do not hold a green card and are not 'substantially present' in the U.S., are not subject to capital gains tax on the profit from any sale of an investment in a corporation. They are, however, subject to income tax on any dividends coming from that corporation. Non-citizens may also be subject to the tax laws of wherever they currently live, so consulting with a tax professional is usually a good idea.

  • How many shareholders can a C corporation have?

    C-corps can have an unlimited number of investors. They can also have an unlimited number of share classes. This allows for flexibility as the company grows. Early investors, for example, who need to be persuaded to invest when the company is young and the risks of failure high, can be given preferred shares with rights of control and to distributions greater than investors who come on board after the company is more established. Even as a company becomes larger and less risky, large institutional investors may demand preferential share treatment in exchange for a large investment.

  • How many shares should I issue when incorporating?

    A corporation has authorized shares as well as issued and outstanding shares. It is important for investors to understand both types.

    Issued and outstanding shares refers to how many shares have been sold to investors or, in other words, how many shares are on the open market and being traded. Authorized shares refers to how many shares could possibly be sold to shareholders without an amendment to the Articles of Incorporation. This number represents the minimum amount a share could be made worth without a shareholder vote.

    The amount of shares to be issued is determined by the percentage ownership an investor is seeking and the amount of shares already outstanding. The investor will also keep an eye on the number of shares authorized, as that represents the maximum amount his or her ownership can be diluted. In setting the number of authorized shares, more is often better for the founders of a company, but some states will charge a franchise tax on the number of shares authorized.

  • Why do venture capitalists prefer C-corps?

    A venture capitalist invests in a company that they believe has high growth potential. This is a company that will attract additional investors in the future and be acquired or become publicly traded. A C-corp best suits these needs. A C-corp can attract an unlimited number of investors with multiple share classes. It is also the only corporate form that can be publicly traded on a stock exchange.

    The downside of a C-corp, the element of double taxation, is also not as important to venture capitalists. They want the earnings of the company to remain within it to be used to fund future growth, not paid out as dividends.

  • How do I change from an S-corp to a C-corp?

    By default, a corporation is a C-corp. To become an S-corp, an IRS election has to be made. To once again become a C-corp, that election must be revoked. To do so, a Statement of Revocation of S Corporation Status should be filed with the IRS. This is a signed letter containing:

    • The corporation's intent to revoke its S-corp status.
    • The corporation's Employer Identification Number (EIN).
    • The number of shares issued and outstanding.

    If the Statement of Revocation is filed in the first quarter of the tax year for a corporation, it becomes effective that same year, but two tax returns must be filed. One for the period the corporation was an S-corp and another for the period after becoming a C-corp. If filed after the first quarter, the revocation becomes effective at the beginning of the next year and only one tax return is required.

  • How much does it cost to form a C-corp?

    C-corp filing fees can vary from state to state, with fees starting at $40 and going as high as $500. You might also encounter annual license fees charged by your state of incorporation.

    Some people file the incorporation paperwork themselves, researching the legal requirements, gathering the necessary documents, and going through the steps required by the state's filing systems. If you are hoping to avoid the hassle of doing it yourself, the Rocket Lawyer Business Services team can help you form your C-corp at an affordable price. If you sign up for a Rocket Lawyer membership at just $39.99 per month, you will only pay your state's filing fees to incorporate. Non-members still receive a great deal at $99.99 plus state fees.

    If you are incorporating in a state where you do not have an actual physical address (P.O. boxes do not count), you will need to have a registered agent. The registered agent is there to receive any legal or other official correspondence for your business. If you do not have someone to serve as your registered agent, Rocket Lawyer can help with that too. Our Business Services team can help set you up with a registered agent for only $149.99, with a 25% discount if you are a member.

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customer care specialist Justina