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The business owner has a range of choices when it comes to legal structure. An individual, such as a shop owner, contractor or freelancer can create what is called a sole proprietorship. If you go into business with one or more others, you may decide to create a partnership. Should you choose to incorporate, however, you can go one of two ways: You can choose to form an S-corporation or a C-corporation.
So what is a C-corp?
A C-corporation is a structure most common to larger organizations that can also suit smaller ones. C-corp status offers tax and other advantages but also imposes a lot of administrative requirements on the business owner(s). Some states require more of the C-corporation than others. Generally speaking, however, the formulation of by-laws and articles of incorporation, the election of a board of directors, and scheduling and recordkeeping relative to directors' and shareholders' meetings are requirements.
One thing that distinguishes the C-corporation from the sole proprietorship is that a C-corporation exists separately from its owners. This means that if the company is sued or goes into debt, the assets of the owner(s) will not be vulnerable. Forming a C-corporation can mean the difference between worrying about exposing your personal assets to claims from creditors, or allowing yourself to sleep peacefully at night.
To establish that separate identity, a C-corporation is given its own tax identification number by the Internal Revenue Service. On the downside, the profits of a C-corporation are taxed twice: The corporation itself is taxed when its returns are filed. Shareholders who receive dividends are also taxed when they fill out and submit their individual returns. On the upside, C-corporations can deduct the cost of any fringe benefits they provide to employees when the corporate return is filed. This can make offering fringe benefits more affordable. A healthy program of fringe benefits may enable the business to attract more qualified employees.
In addition, a C-corporation can raise capital by selling stock, something a sole proprietorship or partnership cannot do. In some instances, this capability may make it easier to raise financial backing. The administrative structure that accompanies C-corp status can prove to be a negative. Regular shareholder meetings must be held -- once a year at least -- and minutes must be recorded. Each corporation must have its own president, secretary and treasurer. Shareholders must elect a board of directors who are required to meet regularly and vote on major decisions. In some cases, those decisions must also be approved by the shareholders. In other words, a system of checks and balances created with an eye toward accountability must be established.
For business owners accustomed to making decisions regarding the direction of the company on the fly, this structure can seem cumbersome, if not counterproductive. Owners and employees alike may bemoan such changes, looking with nostalgia upon the days when the business was "smaller and more personal."
By-Laws and Articles
A C-corporation must file articles of incorporation with the state secretary of state's office. It must also create and record a set of by-laws. Very often, these administrative requirements require the services of one or more lawyers which can prove costly.
C-corp status offers definite positives, but its administrative requirements can prove deleterious to the entrepreneurial spirit.
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