C Corporation

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source by: wikipedia.org

 

When to Incorporate

 

A venture usually does not need to incorporate in its very early stages. The need for incorporation often arises from a specific event such as:

 

  • The business begins to sell a product, opening up potential liability.
  • The business seeks external financing, necessitating the need for a formal legal structure.
  • Some other specific reason develops.

 

From a venture capitalist's point of view, C corporations are the preferred choice of business form because the VC partnership does not want to see the pass-through income. For entrepreneurs without VC funding, limited liability companies are the preferred choice since losses in the first few years can pass-through for personal tax deductions. Delaware now allows easy conversion from a limited liability company to a C corporation.

 

Forming a Corporation

 

To form a corporation, an incorporator (anybody can act as one, e.g. the secretary of a lawyer) performs a name check to determine whether the proposed corporate name is available in the state of incorporation. However, the right to use the name is in the domain of trademark law. The incorporator then files the articles of incorporation. Most large corporations are incorporated in Delaware because of its highly developed corporate legal system.

 

The articles of incorporation include:

 

1.The name of the corporation, which must be followed by a corporate indicator such as "Corporation", or "Ltd."
2.The address (not a post office box) of the corporation's registered office and the name of the registered agent at that office. The registered agent is the person to be served if the corporation is sued. This is an office for legal purposes and does not have to be the corporation's business office.
3.The length of time that the corporation is to exist. This duration can be perpetual or renewable.
4.The capital structure such as common stock, preferred stock, the rights and responsibilities of each, and how much of each. One often authorizes about 20 million shares of common stock and 5 million shares of preferred stock. However, many closely-held small corporations that do not require outside investors may have only common stock and may limit the authorized shares to only a few thousand in order to minimize franchise taxes, depending on the state.
5.The name and address of the incorporator.

Up to this point in the incorporation process, one has spent no more than a few hundred dollars in fees for filing the articles of incorporation. The incorporator then elects a board of directors and goes away as the board of directors takes over. The directors then issue shares and elect the officers.

 

Taxation

 

For a corporation organized under subchapter C of the 1986 IRS code (known as a C-corp), the federal tax rate ranges from a minimum of 15% to a maximum of 35%, depending on the corporation's level of taxable income. All but the smallest corporations are taxed in the 34% - 35% range at the federal level. The state tax rate varies.

 

Double taxation may be an issue with C corporations since profits paid out as dividends are taxed a second time at the personal level. To reduce the tax burden, the company can include debt in its capital structure, but at a certain level of leverage the IRS will reclassify the debt as equity. A more common way of reducing the tax burden is to pay year-end bonuses so that the corporate income is reduced to near zero. However, there is a limit to what the IRS considers reasonable compensation, at which point further amounts are considered to be non-deductible.

 

Another way to reduce the tax burden is to form a general partnership or a limited liability company that owns the equipment used in the business. The rental fees for the equipment can be used to channel income.

 

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