If you own a C-Corporation , you must have articles of association that explain the regulations and rules that govern your business. In addition, most states require limited liability companies (LLCs) and corporation to have an LLC operating agreement. This document functions similarly to bylaws.
Corporations and LLCs are not required to file their documents with the Secretary of State. This information is often requested by lenders, banks, attorneys, and potential investors.
Want to learn more about the operating agreement for an C-Corporation? Continue reading our article.
Definition of a C-Corporation
A corporation stands for a distinct legal entity founded to conduct a business. Unlike a sole proprietorship or partnership, a corporation manages a venture on its own behalf. Hence, the owners are usually not personally responsible for corporate debts and liabilities.
There are two main categories of a corporation: C-corporation and S-corporation. The fundamental distinction between them lies in the method of taxation. An S-corp is a “pass-through” tax unit. The income is taxed only when it is distributed among the owners, who declare the income in their personal tax returns. A C-corp, in turn, files its own corporate tax returns. Therefore, proceeds are taxed first at the corporate level and then at the shareholder level. It is called double taxation.
Because of the limited liability and lack of constraints of an S corporation, a C-corporation along with an LLC is among the most popular models.
How Do C-Corporations Work?
In comparison to some other ways of registering a new enterprise, it takes more time and effort to keep a corporation working smoothly.
Above all, to launch a venture, you are to provide for an internal structure, which is strictly regulated and includes shareholders, board of directors, and officers. Next, it is vital to hold at least one meeting of shareholders and directors per year during the functioning of an organization. Minutes of each such meeting should be kept as proof of the legitimacy and transparency of a corporation. Furthermore, you will probably need to have a list of the owners’ names and the percentage of their shares to organize the data, since the number of C-corp shareholders is unrestricted.
All revenue generated by a corporation before being distributed among its shareholders is subject to corporate income tax. The remaining sum is paid out as dividends. The owners indicate the earnings received in their personal tax returns.
Pros and Cons of C-Corporations
Each organization has unique features, so selecting a business model to fit its needs is a big decision. Dozens of people decide every day to open a C-corp. However, is it right for you? To answer this question, let’s analyze the strengths and limitations that a C corporation provides.
The benefits you get by choosing a C-corp are the following:
- The owners of a corporation are commonly not personally in charge: The responsibilities given by the corporation don’t extend to others as it acts as a separate legal entity. Due to this, if a firm is sued, the owners’ property will be intact;
- The creation of a C-Corporation entails fewer formalities than in the case of an S corporation: The number of shareholders of an S-corp may not exceed 100. At the same time, the participants are to be residents or citizens of the USA. LLCs and corporations are also not permitted to possess an S-corp. C-corps have no such limitations;
- The duration of a C corporation is open-ended: A corporation conducts commerce under its own name, so it does not depend on modifications in the membership;
- A corporation enjoys all the rights of a separate legal entity: It is free to acquire, possess, and use any movable or immovable property. In addition, such a firm may sue, enter into a contract, grant a loan, and so forth on its own behalf;
- Tax advantages: C-corps are entitled to a variety of tax benefits. Depending on the characteristics of your venture, you may qualify for various tax deductions and other benefits not available to other entities;
- Straightforward ownership transfer: C-Corporation shares can easily be sold, giving not only the ownership of the enterprise but also the right to participate in management;
- More opportunities to raise financing: In contrast to other models, it is relatively easy to invest in a C-Corporation . To generate regular gains, investors only need to purchase shares of the firm;
- The shareholders are relieved of the need to take part in the routine running of the venture: A corporation is managed by a board of directors, which also appoints officers to handle everyday tasks. The shareholders, in turn, form the board of directors;
- A wealth of jurisprudence: The legislation regulating an LLC may vary from state to state, while the approach toward the corporations is the same everywhere. That way, you always have the whole picture and can foresee the legal outcomes of the firm’s activities.
Along with the strengths, the option of a C corporation is inevitably related to some downsides. The most considerable of them are as follows:
- Double taxation: Since company earnings are taxed twice, the tax burden for a C-corp can be quite substantial. Nevertheless, you can save money by consulting an experienced accountant;
- Formal requirements: As opposed to an LLC, a corporation has to meet many criteria to maintain its good name. You should hold meetings of shareholders and directors, as well as keep minutes.
How To Design a C-Corporation Agreement?
When starting a corporation, the owners should draft and adopt an agreement on the basic principles of its operation and shareholder relations. This agreement is called the bylaws of the corporation. The process of preparing this document consists of several successive steps. The main ones are the following:
Choose Those Responsible For Writing the Bylaws
In agreement with the other owners, you may entrust one or more shareholders to draw up the bylaws. The main strength of this option is savings. Nonetheless, remember that to compile a quality paper, it is preferable to have experience in managing a corporation. It is essential as the activity of such companies is associated with compliance with a number of regulations, and a mistake can lead to legal implications.
To save time and avoid the hassle, many modern entrepreneurs create their bylaws through online agencies. A professional service providing company creation and maintenance services can offer you the customized bylaws template at a reasonable price.
Another option involves hiring an attorney. This method will suit those interested in obtaining a high-quality form. Of course, the lawyer’s work requires a fee. However, this is absolutely worth it if you want to protect the interests of your venture as much as possible. Thanks to their experience and knowledge, a specialist will help you anticipate all the most widespread risks to make your company’s operations more stable.
Design and Write Your Bylaws
The content and scope of the bylaws are determined by the features of your entity. However, in most cases, such documents have a similar structure. For convenience, bylaws are typically divided into several articles, and each of them regulates a certain sphere. Let’s take a look at them in a little more detail.
Stock Certificates and Ownership
This section specifies whether the shares will be issued in paper form or electronically, and how they will be accounted for.
State exactly where your company’s office is located. Alternatively, you may also provide general information indicating that the office is located in the home state of the corporation.
Specify ways to change the main office address.
The law obligates the corporation to hold at least one director and shareholders’ meeting a year. You can, however, provide for more frequent meetings. Additionally, think about the criteria for proper notice and voting rules for making decisions.
Board of Directors
How and how long are directors elected? How many of them should there be? In addition to these points, this section can cover the director’s resignation procedure and other rules for their operation.
Think about how many officials you need for the effective functioning of your corporation and decide on their liabilities and the procedure for assigning them.
A director or an officer who has taken action at their own expense for the benefit of the corporation may be compensated. Meanwhile, in addition to the list of grounds for granting compensation, it should be provided for cases when it is not paid. These include, for instance, willful misconduct.
Your corporation’s objectives and needs may change over time. To keep the agreement up to the minute, you should amend it in a timely manner. This usually requires the approval of a certain percentage of shareholders or directors.
In this final section, you can add all the information, which does not correspond to the topics of other articles.
Adopt the Bylaws By Following the Established Procedure
For the bylaws to take legal effect, you need to accept them properly. This can be done in 2 ways:
- Adoption by the initial board of directors at a meeting or by unanimous written consent;
- The creator of the corporation may accept the bylaws by signing a written agreement. Later, the board of directors also approves the agreement.