A C-Corporation is the traditional corporation most people are familiar with. It is owned by shareholders and is subject to federal securities laws with some exemptions. Non-public offerings, "seed capital" investments, offers up to $5,000,000 and offers to accredited investors are all examples of exemptions although each exemption requires conforming to specific criteria. If an exemption applies to the corporation, it's important that it file a notice of exemption with the Securities and Exchange Commission (the SEC) and with the equivalent state agency. The C-Corporation may not be ideal for owners of smaller businesses interested in limiting tax liabilities and retaining more personal control over the company’s operations. Limited liability companies and S-Corporations (corporations that qualify for pass through taxation) may be better options. If it is the shareholders' intent is to seek major investment capital then a C-Corporation is probably the better choice. This is particularly so if the intent is to take the company public (selling shares of the company to the general public). Public corporations' shares are traded on stock exchanges such as the DOW and NASDAQ. Limitations on S-Corporations (where only a single class of stock is allowed) and LLCs (which typically do not go public) make these types of companies unappealing to venture capitalists.
One of the primary advantages of the C-Corporation is the ability to issue different classes of stock generally known as common stock and preferred stock. Most corporate shares are common stock. Preferred stock affords an ownership interest while limited voting rights. However preferred stock comes with other advantages. Investors in preferred stock are usually guaranteed a fixed dividend. If the corporation is liquidated, preferred shareholders are paid off before common shareholders. In some cases, corporations will issue customized shares where investors' voting rights are tiered (one class of stock gets ten (10) votes per share and another class of stock gets twenty (20) votes per share). Allowing for different classes of stock provides corporate entities flexibility. In some ways, preferred stock is like corporate debt attracting investors less interested in voting and more interested in a specific return (guaranteed dividends are like interest payments).
In a C-Corporation, a board of directors is appointed which is required to hold annual meetings and keep minutes. Failure to maintain these and other corporate formalities puts shareholders’ limited liability at risk. To avoid having creditors and others “pierce the corporate veil”, many businesses hire outside companies or attorneys to manage corporate activities. The C-Corporation is financed by its shareholders and/or outside investors, and has the potential to be a publicly traded company.
The tax liabilities for C-Corporations and their shareholders are complex. C-Corporations pay taxes on their profits at the corporate tax rate and their owners are taxed on dividends, salaries and bonuses received (the dreaded double taxation). For companies that do not qualify for S-Corporation status, there are ways to limit this tax burden including salaries and bonuses to shareholders and the retention of earnings. However, there are limits to the amount of earnings a corporation can retain before facing penalties and on the amount of compensation the IRS considers reasonable.
For a free consultation, please contact San Diego Corporate Lawyer Donald R. Oder at (888) 900-9002.