Hi. This is Barry Haimo. Thanks for tuning in for another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today we’re jumping into corporations. We’re going to break the video on corporations into two videos. One for C corps, and one for S corps. Today we’re talking about C corps. 

So, C corps are just corporations formed with the state of Florida. You need to file articles of incorporation with the state that creates a separate legal entity. It’s not hard to do. The number of owners that you can have is a minimum of one. In terms of raising capital, it’s very easy because you can just sell stock or issue stock to bring in new shareholders. 

These types of entities don’t die. They don’t die with you like a sole proprietorship or maybe a general partnership. They can continue on in perpetuity unless the shareholders agreement or the bylaws says otherwise. Again, definitely do your shareholders agreement or bylaws. You’ll learn why later. 

Operationally, here’s how the structure works. Your shareholders elect directors, and directors appoint officers to carry out the vision and execute their executives. They’re executing on the vision and the plan that is established by the board of directors, indirectly by the shareholders. So if the shareholders are unhappy with performance, then they can elect new directors, or they can encourage those directors to replace their executive team to execute a better plan or a different plan. So that’s the structure of the centralized management of a corporation. 

In terms of liability, the shareholders have limited liability. Really, their liability is limited to their investment into the company. Unlike the sole proprietorship, who has no liability protection, or a partnership that has no liability protection, shareholders in a corporation are limited. 

Everybody seems to know that already. That’s why they incorporate in the first place. As we’ll talk about another time, corporations actually do not provide a lot of protection from creditors of a shareholder, okay? Because a corporation is just another asset that creditors can take away from you if they get a judgment against you as a shareholder – unrelated to the business. 

So there’s two separate ways of looking at creditors. There’s inside creditors and outside creditors. Inside creditors are creditors of the business: slip and fall, breaching the lease, discrimination, defamation. I mentioned PI, I think, already. PI lawsuits, product liability cases. I mean, the sky’s the limit on what can happen in a corporation, but the liabilities are the liabilities of the company. It’s not the shareholders’ problem. 

But if the shareholders get sued, however, unrelated to the business, that business represents an asset of the shareholder that can be taken away. So corporations are great at shielding from corporate liability, but not so much at shielding from personal liability. So there’s a difference.

Taxation wise, they’re also not as good as other options because the corporation will pay income taxes – federal income taxes, and possibly state income taxes – and those taxes are reported on form 1120. And then dividends are also taxed to these shareholders. 

So, you know, it’s getting taxed twice. That’s called double taxation. You may have heard about that before. Interest and, you know, transferring interest wise, you know, you can transfer interests, you can sell your shares, you can transfer your shares, you can do whatever you want with your shares.

The statute has a lot of rules, the default rules under chapter 607. You can look it up and put yourself to sleep if you want, but I recommend you do a bylaws and a shareholders agreement to establish your own rules about what you want to do with those shares, and how you want to limit those transfers of shares. Do you want to be partners with your shareholders’ wives, husbands, creditors, etc? You need to think about that. 

In terms of allocations of profits or cash that accumulates, it’s very common for a business to issue distributions. In a corporation, however, those distributions are dividends we talked about, and they must be paid out pro rata by percentage of interest. You really can’t deviate from that. It’s very inflexible in that regard. 

Dissolving it, terminating the company is easy. I shouldn’t say easy, I’m sorry. It’s very complex. It’s probably the most complex to protect the officers and directors from liability exposure. It has to be done a certain way. But it’s done as a filing, as a procedure. It’s just a pain in the butt. 

I’d wrap up this by saying that corporations are your oldest entity. They’ve been around a long time, probably longer than most of the others, and they’re good in a lot of situations, but they’re not good in other situations. It really depends on your goals. It depends on your desired tax treatment.

Do you want to be passed through? Do you want to be a separate, standalone entity? Are you comfortable with double taxation? Do you want to scale and get a lot of shareholders or not? I mean, there’s so many different factors that really make this kind of an art and a science.

So don’t knee-jerk into anything. Talk to your professionals, and make the right decision from the beginning to avoid a lot of problems later. 

Don’t forget to download our free business entity comparison chart and our free business planning stress test. The links are in the description. Thank you again for stopping by and stay tuned for more.