C-Corps Basics

The formation of a C-Corp can be intimidating but once all the basics are covered, it is easy to start and maintain. Allow us to go over everything and help understand what lies ahead.

C Corps are the most common type of corporation formation. The term C Corp came about because they are governed by the Subchapter C of the Internal Revenue Code. The corporation dates back historically to Rome. The word “corporation” is derived from the Latin word for body, corpus, which is what a corporation essentially is: a separate body or entity. A corporation is actually recognized legally as an individual. While a corporation is not a human being, they are “legal persons” as far as the law is concerned and can even be convicted of criminal offenses, like manslaughter or fraud. It can enter in to contracts, pay taxes apart from its owners and also incur liabilities.

Corporations are comprised of three main groups: Shareholders, officers and directors. Shareholders can also be called members. The Board of Directors typically are elected by the shareholders are identified in the “articles of incorporation” or “bylaws” when the corporation is initially formed. The number of directors usually depends on the size of corporation and can sometimes, in a very small corporation, be only one person who can also be the only shareholder and officer. In large corporations, a board of directors can be very many people but should be an odd number of people for voting reasons.

Great care should be taken in choosing the board of directors as it serves the very important function directing the corporation’s actions. The directors have specific roles and responsibilities to the corporation, primarily to act on its behalf and to be loyal to the corporation and its shareholders. They must meet participate in board of directors meetings and make decisions regarding corporate activities, like entering in to contracts, approving policies and amending the articles of incorporation and bylaws. One of the most important duties of the board is to appoint the corporate officers.

Generally, the initial shareholders are the investors that form the corporation. Shareholders have an investment and ownership in the corporation through shares and each receive a stock certificate that identifies how many shares are owned by that shareholder. It easiest to think of shares as a unit of ownership. The way a corporation divides itself and allows for people to become shareholders is through owning shares. The Articles of Incorporation will specify how many shares will be issued and the value at the inception of the corporation. While there must be a specified number of shares indicated in the Articles of Incorporation, additional shares can be issued at a later time by the existing shareholders. In order to issue more shares, a meeting must be held and agreement must be made to do so followed by a request to the state of incorporation to amend the articles of incorporation that were initially filed.

The directors are responsible for assigning the price of shares. There can also be different classes or types of shares. If there are only one type of shares, it is called common shares of stock. Common stock typically will carry with it voting rights. This is important to shareholders who want to have voting rights and can exercise control in making corporate decisions. Another kind of stock is what is called preferred stock. Preferred stock usually does not include voting rights but is beneficial for the holder as they will be guaranteed a certain amount of dividend payments before any other kind of shareholder will be paid dividends. The way that shareholders make money on their investment is through the payment of dividends. It is up to the directors when to issue dividends and can be in different forms: additional shares, cash or even property. While it is up to the directors when to issue dividends, the shareholders have a right to “force” the payment of a dividend but must show that there was abuse of the directors’ discretion in not paying out a dividend.

Corporate officers handle the day-to-day operations of the entity. They can act on behalf of the corp legally. Officers generally are broken down in to the following positions: Chief Executive Officer (CEO), Chief Operating Officer (COO), Chief Financial Officer (CFO) and Secretary. Sometimes, one person can take on one or more roles, depending on the size.

CEO

The CEO can also be referred to as the President and has the most responsibility of all the officer positions. The CEO is responsible for the overall management of the corporation’s activities. In a smaller corp, the CEO will have more involvement in everyday decisions, like hiring, firing, and daily decision making. Larger corp CEOs will delegate those kinds of activities to managers and will only be involved in high-level management, decisions and the overall “health” of the corp. The CEO will typically be the point of contact between the corporation and the board of directors and often times will often also be on the board.

COO

The COO is usually the number 2 in command to the CEO’s highest position of authority and power and will handle more daily operations, the nuts and bolts, executing the CEO’s directives. Having a good relationship between the CEO and the COO is crucial to the success of a corp as the COO is often responsible for implementing what is necessary to achieve a CEO’s “big picture” goals for a corporation.

CFO

Managing all of the financial planning and risk of the corp falls on the CFO’s shoulders. Usually, a CFO will have a degree in accounting, an MBA or will be a CPA. The CFO also reports to the CEO and works in conjunction with the COO relating to budgets, cost-benefit analysis and financial forecasting. The CFO oversees and manages cash flow and expenses. The board depends on the CFO for accurate financial reporting as the board will make important decisions based on the information.

Secretary

The secretary of a corp is not an administrative position, as it may sound like. Instead, it is a high ranking officer position that is responsible for the efficient running of a company and in particular ensuring that the board’s directives are implemented. They often act as a liaison between the corp and outside professions, like attorneys, bankers or auditors. They attend the board of directors’ meetings and keep the minutes of those meetings. The secretary is typically an attorney as the secretary ensures that the corporation is acting within regulations and laws. Secretaries often take on the Chief Compliance Officer role as well for this reason. Secretaries also maintain the corporate records.