C-Corporation Frequently Asked Questions

What is a C Corporation?

A C Corporation is a completely separate tax and legal entity from its owners, and owners who work in the business are treated and taxed as employees of the corporation (Note: The “C” in C Corporation refers to a subchapter of the tax code; C corporations are one of the most common forms of corporations, and they are frequently referred to generically as corporations). C Corporations are subject to corporate income taxes separate from the owners, where most other forms of business entity allow for the company profits to “pass-through” to the personal income tax statements of the owners. As such, C Corporations are the most formal business entity and they have greater tax reporting responsibilities than other business entities. C Corporations allow for profits to be retained in the business, if desired, and frequently these profits can be taxed at a lower rate than personal income. C Corporations can also pay out after tax profits to its owners in the form of dividends, but this can also lead to double taxation.

What are the advantages of a C Corporation?

• Limited Personal Liability

This limits the liability of the owners/investors to only the amount of their investment. The owners of a corporation are not personally liable for business debts, claims, or other liabilities.

• Perpetual Existence

The existence of a corporation is considered perpetual, although it can be terminated voluntarily by its owners (shareholders).

• Better fringe benefits

While all business entities can provide fringe benefits to its owners and/or employees, the Corporation allows for a greater range of benefits.

• Advantageous Corporate Tax Treatment/Income Splitting

Tax rate on corporate income is usually lower than the tax rate on personal income up to the first $75,000 in income. The owners can arrange salaries and bonuses in conjunction with retained corporate earnings to lower their overall tax rate.

What are the disadvantages of a C Corporation?

• More extensive recordkeeping requirements

Corporations typically require more ongoing paperwork than most other business entities in order to stay compliant with the law and maintain their corporate status. This includes holding and documenting annual meetings of shareholders and directors and keeping minutes of important corporate meetings.

• Dividend payments can lead to double taxation

Dividends are paid to shareholders/owners from the after-tax profits of a C Corporation. The dividends received by the owners are then tax personally on dividends received. This means the income is taxed twice, if dividends are paid.

How is a C Corporation managed?

A Corporation is managed and run by its directors and officers. The directors are appointed by the shareholders and are responsible for the overall management and corporate governance of the corporation. The directors appoint the officers who are responsible for the day to management and operations of the corporation. The typical officer positions are president, vice-president, treasurer, and secretary, although there can be more and sometimes different titles are used. In most states only one director and one officer is required, and they can usually be the same person.

How is a C Corporation taxed?

Unlike many other business entities in which the profits pass through to the owners’ personal tax return (e.g. LLCs, S Corporations, etc.), the C Corporation is a completely separate taxable entity. The C Corporation pays federal taxes on the net profits (after all expenses, including salaries and bonuses) of the business by filing the 1120 form with the IRS. The after tax profits can be paid out to the owners (shareholders) in the form of dividends, or retained for reinvestment of the business. The first $50,000 of net income is only federally taxed at 15% rate, and the next $25,000 is taxed at a 25% rate. Different states have different rules on how they tax corporations.

I required to hold corporate meetings?

Once you receive the filed Articles of Incorporation, which signifies the formation of the corporation by your state, your corporation will need to hold an organizational meeting of the initial shareholders and directors. At this meeting the directors will typically adopt corporate bylaws, distribute corporation stock to initial shareholders, and appoint corporate officers. Also, in most states, directors must meet at least once a year, as directors typically must be elected (or reelected) each year. At the annual meeting the board members accept their election to the board, and transact any other necessary business. The date, time, and location of the annual meeting is typically specified in the bylaws. Written notification of the annual meetings is not usually required, but it is probably a good idea. Other regular meetings may be held as spelled out in the bylaws. Special meetings may be called, and it is typically required that directors receive written notice of the date, place, and purpose all special meetings of directors.

NOTE: It is important to observe these formalities and take corporate minutes of the required meetings. Failure to follow these formalities and properly document your meetings (i.e. keeping minutes) can place your corporate status in jeopardy. The necessary record keeping material, sample bylaws, and stock certificates are included in the Customized Corporate Kit provided by QuickCorps.

How many shares of stock will my corporation need?

The number of initial shares your corporation is authorized to distribute is specified in the Articles of Incorporation. The actual number is more or less arbitrary, at your discretion. QuickCorps uses a default number of 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6), with a par value of one cent (if your state requires par value, otherwise no par value will be assigned). Some states charge more to form a corporation with a high number of shares and/or high par value.

What are bylaws?

The bylaws of a corporation are an internal document that contains rules for holding corporate meetings and carrying out other formalities according to state corporate laws. Bylaws are not filed with the state.

What is stock par value?

Par value is a nominal dollar amount given to corporate shares. It doesn’t necessarily reflect their real value, and is typically set at a low value (i.e. one dollar or one cent). The par value of a share is the minimum price at which it may be sold to shareholders, and the par value must be the same for all shares of the same class. The shares can be sold to the initial shareholders, at par value or more, but the price must be the same for each share. Not all states require a par value. Unless you specify otherwise, QuickCorps will authorize 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6) with a par value of one cent, or at no par value if not required by your state.

What are the differences between officers, directors and shareholders?

A corporation consists of all three: officers, directors and shareholders.

• Shareholders are the owners of the corporation and elect the directors.
• Directors guide and are involved in the fundamental decisions of the corporation on behalf of the shareholders.
• Officers are selected by the directors and run the day-to-day operations of the corporation.

These do not need to be separate people. Any person can fill all three positions. In small businesses, one person can be the only shareholder, the only director, and the only officer.

What is the Form 2553?

The 2553 Form, known as the Subchapter S election, is required to be filed with the IRS to get S-Corporation status for purposes of federal taxation. Filing this Form with the IRS is used to convert a C-Corporation into an S-Corporation.

Under what circumstances am I required to change my employer identification number (EIN)?

If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:

• An existing business is purchased or inherited by an individual who will operate it as a sole proprietorship
• A sole proprietorship changes to an LLC, corporation, or partnership,
• A partnership changes to an LLC, corporation, or sole proprietorship,
• A corporation changes to an LLC, partnership, or sole proprietorship,
• An LLC changes to a corporation, partnership, or sole proprietorship, or
• An individual owner dies, and the estate takes over the business.

When will I know if the name I have chosen for my Corporation or LLC has been accepted?

Although we perform a name search for your company before we file it with the state, the company name is not official until it has been accepted and filed by the state. We cannot recommend making any business or financial decisions based upon the company name until it has officially been accepted and filed by the state.

If your first name choice does not appear to be available, we will automatically proceed to the second name choice. If neither is available, we will contact you to for further instructions. The alternate name is not a required field; if you are not certain that the alternate name will be acceptable to you then please leave that field blank.

I order the Electronic obtainment of my Federal Employer Identification Number (EIN/Tax ID Number), when will I receive it?

Due to the fact that the EIN is filed with the IRS in the name of the company, we have to wait until the state officially forms your company and we receive the official filed documents from the state in order to electronically obtain your EIN. Once we have received your documents from the state we will immediately obtain your EIN electronically and forward everything to you, ASAP.