Directors:
The board of directors are representatives of the shareholders. They
make the important policy decisions of the company and elect the officers.
Many states require corporations to have the lesser of 1) three directors, or 2)
directors equaling the number of shareholders in the corporation.
Officers:
The officers manage the day to day operations of the corporation.
Generally, the first three officers of a corporation are the President,
Treasurer and Secretary. In many states, a for-profit C Corporation with
one director may have one officer fill all three roles.
Meetings:
C Corporations must hold annual meetings of the board of directors, as well as
annual shareholder meetings. Corporate bylaws may be drafted to allow
shareholders and/or directors to attend annual meetings by proxy.
Shareholder
Reports:
A C Corporation will have to issue annual reports to shareholders, updating them
on the financials of the company as well as any other pertinent matters.
State
Reports: Most states require C Corporation to file annual (in some states
biannual) reports with the state, updating the status of directors, officers,
shareholders, and/or the corporation in general.
Most states require one of the following words, or an abbreviation thereof,
to be included in the name of an C Corporation:
|
names
|
abbreviations
|
|
Corporation
|
Corp.
|
|
Incorporated
|
Inc.
|
|
Limited
|
Ltd.
|
Corporations can do business under
additional fictitious names if they file for a "DBA"
in their state or county. (If you are interested in filing a DBA, please inquire
when placing your order.)
When forming a corporation, the founders must determine how many shares the
corporation will be authorized to issue. For example, the founders may
authorize the corporation to issue 1,000 share, but only actually issue 10
shares to the first owner. This leaves the corporation with the
flexibility to issue 990 more shares to future owners.
Some states increase filing fees the greater the number of shares a
corporation wishes to authorize. Generally, a small to medium size
corporation can maintain adequate flexibility and avoid an increase in fees by
authorizing 1,000 shares. Furthermore, if it becomes necessary to
authorize more stock at a later date, the corporation can file to amend its
Articles of Incorporation and increase the amount.
|
types of
stock available:
|
Common stock: Common stock in a C-Corporation represents a percentage of ownership.
Common stock owners are generally entitled to their pro-rata share of corporate
profits.
Preferred Stock:
Preferred stock is often used by C-Corporations. Owners of Preferred
stock are entitled to an annual set return on their investment before profits
are distributed to common shareholders. Additionally, preferred
shareholders may sign an agreement with the corporation that their shares will
convert into common stock if the company upon a certain event (such as corporate
take-over or Initial Public Offering).
Voting or Nonvoting: Both common and preferred shares can be given a voting or nonvoting
designation. This means that the shareholders may be given a right to vote
in matters of the company, and specifically the election of directors.
|
tax
implications for a
c corporation |
Despite the "double tax" on C Corporations, in certain
scenarios a C Corporation may actually offer tax benefits to small
business owners.
C Corporations can allow an owner to take advantage
of corporate tax rates that are lower than individual tax
rates. For example, assume a C Corporation profits
$75,000 in a given year. An owner may leave $50,000 in the
business and pay himself a salary of $25,000 (if reasonable for his
profession). The $50,000 of profits left in the C Corporation
would be taxed at a rate of 15% at the federal level. If the owner
were to recognize the same
$50,000 as personal profits, he would be taxed approximately 10% more.
The structure of a C Corporation can be particularly advantageous
in the early years of operation when owners want to reinvest into their
business. However, owners may reach a point where they want to
take money out of the corporation beyond their salary. At this point
the C Corporation structure becomes less attractive. Profits taken
by the owners as distributions of corporate earnings will be taxed once at
the corporate level and then again upon distribution to the owners.
Some C Corporations can avoid this problem by increasing salaries, thereby never having to make
distributions.
Before employing the tax-splitting
strategy, an owner should consider whether he expects to make distributions,
or whether he would be willing to convert from a C Corporation to a
different entity in the future.
| Federal
tax rates: |
| $0-$50,000 |
15% |
| $50,000-$75,000 |
25% |
| $75,000+ |
34% |
|
tax
implications for shareholders
in an c corporation |
If a C Corporation fails, shareholders who were active participants in the
business can write off their stock purchase as an ordinary tax loss. The
loss can be used to offset ordinary income that the shareholder has from other
sources. For example, if a shareholder purchased 10 shares of a
corporation for $10,000, and the shareholder looses that entire investment, he
can use that loss to reduce by $10,000 the amount of salary income that would
otherwise be subject to income tax.
With a C Corporation, certain fringe benefits can be written off as business
expenses for tax purposes. For example, an owner of a C Corporation can
hire himself as an employee and have the corporation pay his insurance premiums
and unconverted medical expenses. The corporation can deduct this expense,
and the owner will not be personally taxed for the value of the employment
benefit.
Employees of a C Corporation, even if they're shareholders, do not have to
pay taxes on the value of the fringe benefits they receive. Fringe
benefits may include: deferred compensation plans, group term life insurance,
reimbursement of employee medical expenses that are not covered by insurance,
and health and disability insurance. While most entities can deduct these expenses, C Corporations are the only entities that allow employees to escape
taxation on the added value of the benefits.
However, there is a drawback. Owner-employees who put together fringe
benefit plans for the benefit of owner-employee will be taxed on the benefits
they receive.
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