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Form a C corp. to separate personal and business tax liabilities.

How to Form a C Corp

You might have considered incorporating your small business. Do you know how to form a C Corp.? Forming a C Corp. takes more time and money than other types of business structures. But, you are free from personal liability.

If you choose to form a C Corp., you must file the C Corp. election form and closely regulated paperwork to federal and state governments. Some small businesses might find the recordkeeping regulations burdensome. But, corporation owners are not liable for the business’s debts.

C corporation taxes

A C Corp. is a separate entity from its owners. That means the company handles any business debt incurred.

Incorporation pros and cons

There are a number of incorporation pros and cons. The owners are not personally responsible for the business’s debt. Owners cannot get sued for business activities. Incorporation protects the owners’ personal assets.

Because owners are separate entities from the business, corporations are double taxed. The double taxation occurs at the business and personal income levels.

First, the corporation pays tax on its profits. The company reports business transactions on Form 1120, U.S. Corporation Income Tax Return.

People who own parts of a C corporation are shareholders. The shareholders pay taxes on their dividends. Shareholders report the dividends and tax payments on their personal tax returns.

For the C corporation to be double taxed:

  • the corporation cannot claim shareholder dividends as tax deductions
  • shareholders cannot deduct corporation-generated losses on personal tax returns

Owners only pay personal taxes on salaries, bonuses, and dividends. Any other profits are taxed at a corporate tax rate. Corporate tax rates are lower than personal income tax rates. This represents part of the reason why VCs only invest in C corporations.

How to form a C Corp.

All corporations automatically start as C Corps. You must follow all the rules of incorporation. If you don’t follow the rules, you could lose your corporate status. Follow these five steps for forming a C Corp.

Step 1. Name your business

Choose your business’s legal name. The name cannot be another business’s name in your state. To register your legal name, submit the name to your secretary of state. You may have to send one to three options for your business name. The secretary of state will let you know if any of your choices are available.

When you form a C corp., your name should end in “corporation”, “incorporated”, or “limited”. You can abbreviate the end of your name with Corp., Inc., or Ltd.

Step 2. Organize leadership

Appoint directors and officers for your business. Directors oversee business activities and make decisions for the company. The directors select officers, who are in charge of day-to-day operations. You can be both a director and an officer.

Appoint all directors and officers before you fill out paperwork. Check with your state laws to see if you need to elect a certain number of directors or officers.

Directors need to hold regular meetings. You must keep records of discussions and notes from the meetings.

After you organize a board of directors, you need to write out bylaws. What are bylaws? Bylaws are rules that control how you run the company, when you hold meetings, and how you vote.

Step 3. File articles of incorporation

Articles of incorporation are formal documents that make your business a legal corporation. Information in the articles of incorporation includes your business’s name, address, and directors.

Because it is a legal document, you may want a lawyer to help you. File the articles of incorporation with your secretary of state.

Step 4. Issue stock certificates

All C corporations have stock. Stock represents ownership in the company. Issue stock certificates to the shareholders. Stock certificates divide the company into percentages between you and the other shareholders.

Most small corporations don’t need to register stock with the federal Securities and Exchange Commission (SEC). You do not have to register stock if you make a private offering to fewer than 35 people. In your case, the shares might just divide the company between owners.

Step 5. Apply for business licenses and identification numbers

Get a business license from your state commerce agency. Also, check your industry and local requirements for other necessary licenses and permits.

Your corporation needs an employer identification number (EIN). You can file Form SS-4 or apply for an EIN online. You need to apply for an EIN even if you do not plan to hire employees. The EIN is your corporate tax identification number. You also need the EIN to open a business bank account and apply for a business loan.

As a C Corp., you need to keep up with your financial records. Patriot’s online accounting software is easy-to-use and made for small business owners. Get started with free setup and support today.

This article was updated from its original published date (9/9/2013).

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