First time business owners have a lot to consider when working to get their operations up and running, including what business structure will fit the needs of their business. A company’s structure influences a number of aspects of the business including, but not limited to governance, taxes, and allocation of liability. Choosing an entity type is not a decision that should be made in haste but, rather, should be carefully thought out and discussed with business partners, an attorney, a tax adviser, and others who will be involved in ensuring the success of the business. One of the many structures that should be considered is the oldest and most common business entity, the C-corporation (“C-Corp”).1
There are numerous advantages to forming a C-Corp: its unique legal identity, significant limitations on liability, perpetual existence, separation between ownership and management, tax planning opportunities, and well-established legal precedents, to name a few.2 A C-Corp essentially operates as a legal person as it can buy and own property, enter into contracts, invest funds, or even lend money. This separate identity means that the liabilities, debts, and obligations do not fall on any one person, or group of people, but on the C-Corp itself. The owners’, known as shareholders, risk of loss is limited to the amount they invest into the business, and nothing more. These shareholders purchase stock or “shares” of the company which can be privately held or publicly traded on a stock exchange. C-Corps are governed by an elected board of directors, who owe a legal duty of care and loyalty to the company and its shareholders. While the board of directors set long term goals for the company and provide corporate guidance, the officers, appointed by the board of directors, handle the day-to-day operations of the company.
Despite the many advantages, C-Corps have a couple of downsides. The most well-known disadvantage is double taxation. Double taxation occurs when a C-Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C-Corp itself has already paid taxes on that profit, but once it is distributed to shareholders, they must declare the dividend as income on their personal taxes as well.3 Additionally, some people hesitate to form their entity as a C-Corp because of the formalities and, depending on the state, expenses that come with it.
In terms of the formalities of creating a this type of entity structure, a C-Corp is created when its articles of incorporation are filed with the secretary of state.4 After filing with the secretary of state, a C-Corp must file a number of documents and follow a number of other procedures in order to preserve corporate status. These requirements include: conducting annual shareholder meetings, maintaining the C-Corp’s records, adopting bylaws, maintaining the business’s finances (separately from personal finances), and filing periodic reports with the state. See below for a step-by-step formation guide for C-Corps.
How do I Form a C-Corp in Colorado?
1. Choose a name for your C-Corp. Colorado Law requires that a C-Corp’s name include one of the following suffixes: Incorporated; Corporation; Limited; Company; or an abbreviation of any of these terms (Inc., Co., Corp., Ltd.). The name may not imply that the C-Corp is organized for any purpose other than one permitted by Colorado State Law or its articles of incorporation. It is important to run a search through the Business Database before selecting a name to ensure there is not a business that has already filed under your proposed name in the state of Colorado.
2. File a form to create a new record with the Colorado Secretary of State. Next, go to the Colorado Secretary of State webpage here and click the “Business” tab. Select the “File a business document” link, and then choose “File a form to create a NEW record.” Next click the “Profit corporation” link. You will be prompted to enter the business name (don’t forget the suffix!)
If the name is available, you will be directed to a webform where you will enter the information required to create your C-Corp including:
- The address of the company’s principal place of business
- The name and address of the registered agent of the corporation (must be a Colorado resident)
- The name and address of the person incorporating the company
- The number of shares the company is authorized to issue
- The true name and address of the person filing the document
When successfully filed, you will be directed to the transaction confirmation page. This confirmation means that the document has been successfully filed, your business name is registered, and you have paid the fee through the secretary of state. Your C-Corp is now in existence!
At this point you can choose to set up “Secure Business Filing.” This feature adds password protection to the company’s account. Secure Business Filing ensures that only individuals with proper authorization from the company can make changes or file documents on behalf of the business. If you decide to go this route, you should make sure that the password is saved in a place that can be accessed by other owners or directors of the C-Corp that may be filing documents on behalf of the company.
3. Apply for an EIN Number. The final step you will need to complete takes place on the IRS website, accessed here. Here you will be filing for a Federal Tax I.D. Number (“FEIN”). The FEIN is the tax identification number for the company that is used on tax returns and other financial documents, you can think of this as the corporate version of a social security number. Once you access this website you will choose the “Corporation” link on the main page and enter the same name you put on the articles of incorporation that you filed on the secretary of state website. The webform requires additional information, such as:
- DBA – Doing Business As name if you are operating under a different name than the legal name
- Responsible party for the Entity’s information including SSN
- Address of the business
- Entity facts found on the articles of incorporation
- Other questions regarding the industry in which you operate
- Financial information about employees
Once the form is submitted, you will be issued a FEIN by the IRS.
The above encompasses the very first, required steps for setting up a C-Corp, but other considerations for positioning your C-Corp for success include:
- Recording and distributing stock certificates evidencing ownership of the company
- Opening a bank account under your business name
- Obtain a State Tax Number:
- If you plan to have employees in the State of Colorado you must obtain a Colorado State Wage Withholding Account in order to withhold state income taxes from payroll
- If you plan to sell products in the state, you must obtain a Sales Tax License
- More information can be found on www.taxcolorado.com
- In Colorado, a business license is not always required. A “general business license” does not exist in the state. However, many businesses do need a specific license or licenses depending on the type of business and how it is regulated.
- The License Database put together by the Office of Economic Development and International Trade lists licensing requirements at both state and local levels.
- The Department of Regulatory Agencies maintains a list of licensing applications for the many types of businesses it regulates at the state level.
- Hire an Attorney to draft bylaws, shareholder agreements, and written consents. A skilled corporate attorney can help you maintain the business’s corporate status, help you create the contracts you use to conduct your business, and help you navigate the complexities of corporate governance.
If you have any other questions concerning how to form or maintain a C-Corp, please contact The Rodman Law Group, LLC at 720-663-0558.
3. IRS, Internal Revenue Service, Forming a Corporation, https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation