The Week's Big Idea: Incorporate

If you plan to pursue venture capital, have lots of shareholders and employees, use stock options for compensation, or go public, a C-corporation is the right choice for you.

Big ideas, big market sizes, and big ambitions

Today, we reach the pinnacle of US incorporation: the C-corporation. C-corps are the most sophisticated of the three corporate structures. They are used by public companies and private companies that hope to grow massively with the help of experienced investors.

A C-corp separates the owners and operators of a business. Ownership is tracked by shares. You can be both an shareholder and an operator, but you have little flexibility in how you pay yourself and manage your taxes.

Most C-corporations are established in Delaware and apply for foreign corporation status in their main state of operation. Anyone from anywhere globally can establish a Delaware corporation. This used to be very expensive, but services like Stripe Atlas have set up turnkey incorporation packages at flat rates. However, you should plan for $10,000 annually in administrative, compliance, and legal costs. 

You will have similar administrative requirements to an S-corp: articles of incorporation, bylaws, and a shareholder agreement, plus regular board meetings with recorded minutes and resolutions. However, you can have unlimited shareholders from anywhere and issue multiple classes of stock, like preferred and common or super voting shares.  

The tax party is over

The big downside of a C-corp is double taxation. The earned income of a C-corp is taxed twice. The company is taxed on its profits, and you are taxed again on your payroll income and dividends. You cannot pass income or dividends to yourself at your discretion.

At a certain threshold of income, C-corps must use accrual accounting. You will want a CPA with audit experience do this for you. And you’ll need a robust accounting and expense management system. 

One unique thing about C-corps is that you can offer multiple classes of stock. Some shareholders get the right to vote or get paid first. If you ever wondered how the guys at Uber all got fired but kept control of the company, a super voting share class is the answer. Most companies have preferred and common stock types.

If this is making your head hurt, or you know none of this is relevant for you for at least three years, start as an LLC. Or talk to your tax advisor, who can review your specific situation and recommend nuanced options.

If you know you want to pursue professional outside investors and issue multiple shares of stock, start with a C-corp from the beginning. 

Today's Assignment: test your choice 

Are you feeling confident about whether or not to incorporate? If it’s time, check out this step-by-step incorporation wizard to verify your thinking. 

Next Week: Stepping up your financial operations - EINs, business credit, and self-financing 

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