When starting a new business in North Carolina, there are a few things to consider. One of the most important decisions is how you will structure the business. A corporation is a separate legal entity formed by filing articles of incorporation with the Secretary of State. In this article, we will discuss how a corporation forms in North Carolina and some of the benefits and drawbacks of starting one.
Talking with a business attorney can help you make the best decision about the best business structure to conduct business in your arena. Many structures, including corporations, can help you from becoming personally liable for others’ mistakes.
Two Types of Corporations in North Carolina
In North Carolina, there are two corporation types: C Corporations and S Corporations. Both types provide liability protection for personal assets. If someone else makes a bad decision, your own assets remain safe to an extent.
Like a sole proprietorship, an S Corporation allows profits and losses to pass through to the members (owners), who report them on their personal income taxes. As a pass-through entity, all profits and losses are passed through to the members and not taxed at the corporate level.
However, a C Corporation is a separate legal entity distinct from its owners and pays corporate taxes as an independent entity. In NC, the state tax rate for C-Corporations is 2.5%. (1)
A C corporation’s profits and losses are taxed at the corporate level, but shareholders also pay taxes on any income generated when they receive dividends as distributions. This is called “double taxation.”
Often, businesses create an LLC or LLP with S-Corp status for Federal tax purposes with the Internal Revenue Service (IRS).
How is a Corporation Formed?
A corporation is a separate legal entity with its own rights, privileges, and liabilities. When forming a corporation in North Carolina, you must file articles of incorporation with the state’s corporate filing office. In North Carolina, that is the Secretary of State’s office.
Raising Capital
However, for a C corporation, you first raise capital. This can be done by selling shares of stock to investors. Once you have raised enough capital to run the corporation, you can then file articles of incorporation and officially form your company.
A business formation attorney can help you raise the funds you need to get started.
Writing an Operating Agreement
A limited liability company with multiple members uses operating agreements to define how the owners (members) will operate their business. However, a C corp instead develops a shareholder agreement to establish business operation issues.
As a C corp, your agreement serves as a contract between the shareholders of the corporation. This shareholder agreement outlines how the corporation will manage its business and how it will make decisions.
Shareholders elect the corporate directors. They appoint directors who are then responsible for appointing the corporate officers.
Filing as a C Corp
The documents required to form a corporation involve providing information such as:
- Corporate name of your business
- How many shares it authorizes
- The corporation’s shareholders
- How much each share is worth
- Who will serve on the board of directors
- How long the corporation will exist
- How often you will hold meetings
- Who will act as registered agent
Once the Secretary of State accepts the articles and business name, any number of people can become shareholders by exchanging money, property, or both for capital stock in the corporation.
The shareholders elect members to serve on a board of directors who are responsible for providing oversight and making major decisions about how the business runs.
Pros and Cons of a C Corporation
A corporation has many benefits over other forms of business entities. One of these benefits is limited liability for shareholders. C corps can have an unlimited number of shareholders and can issue stock certificates with multiple classes.
However, there are drawbacks to forming a corporation that you should consider before making your decision. These include double taxation, complex paperwork requirements, and added costs associated with legal fees and filing state documents.
The c corp business model must carefully follow the rules of the incorporation process and comply with all state and federal laws.
When opening a corporate bank account, you’ll need legal documents such as:
- Personal identification
- EIN number
- Business Licenses
- Certificate of Corporation Name
- Corporate Bylaws
- Articles of Incorporation
Pros and Cons of an S Corporation
An S corporation is a corporate business entity that does not pay taxes on its income. Instead, the owners are responsible for paying taxes on their share of the company’s profits.
Businesses often call S corps “pass-through entities” because the profits and losses of the company are “passed through” to the shareholders and reported on their individual tax returns.
S corps must have 100 or fewer shareholders and can only issue one class of stock.
In North Carolina, S corps are subject to the state’s corporate income tax rate of three percent. However, they may also be subject to the state’s franchise tax, which comes from the value of the corporation’s assets.
For tax years beginning on or after January 1, 2019, the state tax rate for an S-Corporation is $200 for the first one million dollars ($1,000,000) of the corporation’s tax base and $1.50 per $1,000 of its tax base that exceeds one million dollars ($1,000,000). (1)
How to Form a Business Entity in North Carolina
Once you’ve decided on your business structure, you’ll need to obtain the necessary licenses and permits. The North Carolina Department of Commerce’s Business License Information Center can help determine your required licenses and permits.
You will also need to register with the North Carolina Secretary of State’s office and obtain a federal Employer Identification Number (EIN).
Choosing Your Legal Entity
In the end, how you choose to form your business depends on how much liability protection you need, how involved the shareholders will be in running the business, and how complicated your structure is.
Knowing how a C corporation forms in North Carolina can help you make an informed decision about the best type of business entity for your needs.
We Can Help
At Hopler, Wilms, and Hanna, our corporate business attorneys can help with all aspects of forming a corporation in North Carolina. We can advise you on how to set up and maintain a legal entity, how to file the necessary documents, and how to stay in compliance with all legal requirements. Contact us today for more information and set up a time to talk about your plans.