What is a C corporation and how do I form one?

What is a C corporation?

A C corporation is a business structure that creates a legal entity separate from its owners. This separation means the business itself is responsible for its own debts and legal obligations, not the individual owners. This structure offers the strongest protection to its owners from personal liability, safeguarding their personal assets from business-related issues.

While C corporations provide significant liability protection, they also come with higher costs to form and require more extensive record-keeping, operational processes, and reporting compared to other business types. Despite these complexities, C corporations have an advantage when it comes to raising capital because they can raise funds through the sale of stock. This ability to issue stock can also be a benefit in attracting employees, as stock options can be part of compensation packages.

How are C corporations taxed?

In a C corporation, corporate profits can be taxed twice. First, the company pays taxes on its profits, and then, when those profits are distributed to shareholders as dividends, the shareholders pay taxes on those dividends on their personal tax returns. This is often referred to as "double taxation."

The IRS requires corporations to file Form 1120 for their income tax returns. However, an eligible domestic corporation can choose to be treated as an S corporation by electing S corporation status, which can help avoid this double taxation. The IRS provides guidance for taxpayers who wish to change their filing status from a C corporation to an S corporation, which files Form 1120S.

The IRS also has specific rules for how corporations account for uncertain tax positions. For instance, FASB Interpretation No. 48 (FIN 48) aims to standardize how uncertain tax positions are recognized, de-recognized, measured, and disclosed in financial statements that follow U.S. Generally Accepted Accounting Principles (GAAP). The IRS has also finalized Schedule UTP and its instructions for certain corporations to report these uncertain tax positions. For large corporate taxpayers, the IRS's Large Corporate Compliance (LCC) program uses data analytics to identify companies for audits to address noncompliance.

How do I form a C corporation?

To form a C corporation, you will generally need to register your business with any state where you plan to conduct business activities. The primary legal document required for formation is the articles of incorporation, sometimes called a certificate of incorporation. This comprehensive legal document outlines the basic structure and details of your business.

Additionally, your business will need an Employer Identification Number (EIN), which serves as your business's federal tax ID number. You will use this number for various federal tax filings and other business-related purposes.

What are the ongoing compliance requirements for a C corporation?

C corporations require extensive ongoing record-keeping, operational processes, and reporting to maintain their legal status and comply with various regulations. Beyond general business records, the IRS requires corporations to file Form 8806, an Information Return for Acquisition of Control or Substantial Change in Capital Structure, when certain events occur, as defined in the regulation.

Some companies may also be required to file reports with the U.S. Securities and Exchange Commission (SEC). SEC rules mandate that certain companies file annual reports on Form 10-K and quarterly reports on Form 10-Q. The company's CEO and CFO must certify the financial and other information contained in these reports. Additionally, current reports on Form 8-K must be filed to report specific events, often within four business days of their occurrence. All this information must be filed electronically through the SEC's EDGAR system and becomes publicly available immediately upon filing.

A company might be required to file a registration statement and become a reporting company under Section 12 of the Exchange Act, even if it hasn't had a public offering. This requirement applies if the company has more than $10 million in total assets and a class of equity securities, such as common stock, that is held of record by either 2,000 or more persons, or 500 or more persons who are not accredited investors. Listing securities on a U.S. exchange also triggers this requirement. For banks, bank holding companies, and savings and loan holding companies, the threshold is 2,000 or more holders of record, without the separate trigger for 500 or more non-accredited holders.

When calculating the number of holders of record to determine if Exchange Act registration is required, a company may exclude persons who acquired their securities in certain exempt offerings. These include securities acquired under an employee compensation plan, under Regulation Crowdfunding (if the issuer meets specific conditions like being current in annual reports, having total assets not exceeding $25 million, and using a registered transfer agent), or as a Tier 2 offering under Regulation A (if the issuer meets conditions like being current in financial reports, having a public float of less than $75 million or annual revenue less than $50 million, and using a registered transfer agent).

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