What Is a C-Corporation?
A C-Corporation, often referred to as a “C-Corp,” is a legal business structure that separates the company from its owners and provides limited liability protection to shareholders. It is the most common type of corporation in the United States, offering several benefits and flexibility for startups aiming for rapid growth and outside investment.
Characteristics of a C-Corporation
C-Corporations possess distinct characteristics that set them apart from other business structures. They include:
– Separate Legal Entity: A C-Corp is treated as a separate legal entity from its owners, enabling it to enter into contracts, own assets, and sue or be sued.
– Perpetual Existence: A C-Corp continues to exist even if the founders, management, or shareholders change or leave the company.
– Limited Liability: Shareholders and management are generally not personally liable for the corporation’s debts and obligations, protecting their personal assets.
– Ownership Transferability: Ownership in a C-Corp is easily transferable through the sale or transfer of shares, simplifying changes in ownership structure.
– Potential for Public Offering: C-Corporations have the potential to go public and issue shares to the general public, facilitating access to public capital markets.
Gust Launch can help set you up as a Delaware C-corp on the path toward seeking investment as a high-growth startup.
Formation and Legal Structure
To incorporate a startup as a C-Corporation, entrepreneurs must adhere to specific legal requirements, including:
– Incorporation: Founders file a articles of incorporation with the appropriate state authority, such as the Secretary of State of Delaware. Gust guides you through the process of incorporating a startup seamlessly. Gust Launch’s interactive platform asks you questions about your venture, prepares the appropriate paperwork, and then and directly connects with Delaware to file everything needed for your new venture.
– Registered Agent: A C-Corp must have a registered agent who receives legal and tax documents on behalf of the corporation. Gust Delaware is a subsidiary of Gust that will serve as your registered agent in Delaware.
– Bylaws: Bylaws outline the rules and procedures governing the corporation’s internal operations, including shareholder meetings, director elections, and corporate governance. Your company’s Bylaws will be generated through Gust Launch during your setup process.
– Board of Directors: C-Corporations must have a board of directors responsible for making major decisions and overseeing corporate affairs. You will identify your board members during your setup process, and Gust Launch will manage the necessary board actions and communications during your incorporation.
– Annual Meetings: Holding annual shareholder and board of directors meetings is a legal requirement for C-Corporations to maintain compliance.
Taxation of C-Corporations
C-Corporations are subject to various taxes, see What types of taxes will my startup owe and how can I file? Often times, entrepreneurs are scared by the thought of double taxation (where they are taxed at the corporate level on their profits, and shareholders are also taxed on any dividends or distributions they receive). But it’s also almost entirely irrelevant for any high-growth startup—because almost none of them will have profits. Once a high-growth startup begins to generate revenue, it will almost certainly reinvest all of it in the business to fuel more growth, for at least the first several years. No profits to tax means no tax on profits, as well as no dividends paid to shareholders. For more on taxes and entity types, see S-Corps, LLCs, and Tax Savings for Startups. Also, as your C-Corporation grows, it has other tax advantages, such as the ability to deduct employee benefits, healthcare expenses, and business expenses before calculating corporate taxes.
The types of startups that typically incorporate through Gust Launch may also benefit from the Qualified Small Business Stock exemption. This is a major benefit that requires the company to be formed as a C-Corp, and potentially allows investors to save millions of dollars if the company has a successful exit, provided that it has carefully followed the appropriate rules. It is important for startups to consult with tax professionals to optimize their tax strategy and maximize deductions.
Ownership and Shareholders
A C-Corporation can have an unlimited number of shareholders, who hold shares representing ownership in the company. Shareholders’ rights include voting on major corporate decisions, electing the board of directors, and receiving dividends. As Gust Launch walks you through the incorporation and post-incorporation startup process, you will be given the opportunity to allocate shares of stock to founders and others. Gust’s Co-Founder Equity Split tool can be very useful in helping you and your team think through this part of the process.
Capital and Fundraising
C-Corporations are attractive to investors because they offer a variety of options for capital fundraising and the ability to shield capital gains taxes at an exit. Founders can raise capital by issuing early stage investment vehicles and eventually a priced round, by selling preferred stock to investors, including venture capitalists and angel investors. C-Corporations allow for different classes of stock, such as Common Stock (used for founders and advisors) and Preferred Stock (used for investors). They also allow for Incentive Stock Option plans, which are typically used to provide equity for employees in high growth companies. The equity planning tools in Gust Launch will help you understand the effects of issuing stock at different stages.
When it comes to incorporating a potential high growth startup, a C-Corporation is typically the logical choice, especially when aiming to raise capital from outside investors. Understanding the characteristics, legal structure, taxation, and benefits of a C-Corporation is essential for startup owners. By incorporating as a C-Corporation, you can protect personal assets, attract investors, and position your startup for growth and success.
If you’re ready to unlock the benefits of incorporating your startup as a C-Corporation, start your incorporation journey with Gust, and explore how incorporating as a C-Corporation can provide the legal protection, flexibility, and fundraising opportunities your startup needs. Book some time with someone on our team if you have questions.
Gust Launch can help set you up as a Delaware C-corp on the path toward seeking investment as a high-growth startup.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.