Learn about c-Corporations

C-Corporations are the most common legal company type in the United States and by far the most common company type for companies that plan on raising outside capital like venture capital or angel financing (see Brad Feld's article).  They provide investors with all of the protections that they need to feel good about investing in a highly risky company and, at the same time, they provide the company with all of the features it might need to scale to a very large size--the ability to incent employees, multiple classes of stock, limited liability, etc.  The major difficulty of C-Corporations is that they are complicated to maintain (see the full comparison table below) and they have "double taxation."  Double taxation means that owners of the company are taxed at the corporate level--the C-Corporation must pay taxes itself as a legal entity--and at the individual level--the individual must pay taxes on salary, payments, and distributions. 

Formation Requirements

C-Corporations require a fair amount of work to set up.  At Early Stage Legal, we can set you up with a lawyer-quality package at an unbeatable price.  A complete C-corporation package should include at least the following legal documents:

To learn more see our page on the details of Early Stage Legal's C-Corporation formation process.

Liability

C-Corporations offer limited liability protection.  This means that shareholders and board members are generally not liable for the actions of the company, except for in extremely rare cases of "gross negligence." 

Governance

C-Corporations are controlled by a board of directors.  Generally there is a Chairman of the Board who calls the meetings to order and runs the meetings.  The board members approve high-level company actions like selecting the top managers of the company.  These managers, like the President and CEO, then run the company on a daily basis.  Directors have a duty to be careful in their decisions but they are protected from nearly all liability.  Directors also do not generally get involved in the day-to-day management of the company.

Management

Corporations must select at least a President and either a Secretary or a Treasurer at the time of formation.  Beyond that, the company's management can be created an organized based on the decisions of the Board of Directors as mentioned above. 

Taxation

Corporations must pay taxes at the company level based on corporate income.  Because the individuals running the corporation must also continue to pay their personal income taxes, this is referred to as "double taxation." However, corporations can also enjoy the benefit of accruing net operating loss carryforwards or carrybacks.  These tax rules allow corporations to deduct the loss from income.  Corporations use IRS Form 1139 for carryback NOLs and IRS Form 1120, Schedule K for carryforward NOLs.  These tax benefits are particularly helpful for institutional investors like venture capitalists because they allow the company to benefit from equity investments even after periods of losses which are common for venture-backed startup companies. 

Transferability of Equity

Subject to other legal documents that investors may put in place, shareholders may easily transfer shares of stock in corporations.  Generally shares are bought by investors who want to participate in the growth in value that occurs as a company grows rapidly.  These investors are hoping to sell their shares in a future "liquidity event" or buyout where a large company will buy their shares or where they can sell their shares on a public market after an IPO process.  Because investors want the management teams of their companies to remain hungry for a good outcome, they often put into place protective legal provisions that prevent management team members from selling their shares except during certain qualified

Capital Raising

C-Corporations make capital raising relatively easy.  Founders can sell common or preferred shares to equity investors allowing them to acquire ownership stakes in the company for a price.  As mentioned above, the C-Corporation allows for the establishment of all of the protections that equity investors generally seek.

Ease of Maintainence

C-Corporations are somewhat more difficult to maintain than other company types because:

  • The company must file its own taxes
  • The company generally has to have regular board meetings
  • The company generally has to have annual shareholder meetings
  • The company often requires that minutes must be recorded at board meetings

Ability to Convert to a Different Type of Entity

C-Corporations are quite difficult to convert to nearly any other entity because of the complicated tax requirements involved.  The government does not make it easy for companies to convert from a double-taxation status to a single taxation status for the obvious reason that it decreases government taxes.  Making the conversion often entails significant legal and tax advice.

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