If you are a business owner, you’ve probably explored the advantages of forming a C Corporation or a variety of other business structures to protect your company and its assets. The C Corporation is a business entity that offers a unique set of benefits we’ll dive into below.
Top 6 Advantages of forming a C Corporation
- Limited Personal Liability
- Perpetual Existence
- Better Fringe Benefits
- Tax Advantages
- Ability to Offer Shares
- Fewer Legal Surprises
By forming a C corporation one of the best advantages is having a business structure that legally separates the company from its owners and shareholders. The Internal Revenue Service requires such corporations to file a corporate income tax returns. This differs from an S corporation, which is not subject to separate tax filings.
Here are the Details on the Advantages of Forming a C Corporation
There are many advantages to structuring your business as a C corporation, including:
1. Limited Personal Liability
Forming a C Corporation turns your business into a separate legal entity that is distinct from you and your personal assets. This means that you and your assets cannot be targeted in a lawsuit that relates to your business. Moreover, if a creditor comes looking to satisfy business debt or even the personal debt of one of the other corporation members, they cannot target you and your personal assets.
There are rare instances of piercing the corporate veil where a judge will rule that the structure of a corporation is merely a facade to obscure unethical business behavior, but if you adhere to the formalities of running a corporation, this situation is unlikely to occur.
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2. Perpetual Existence
Another benefit to forming a C corp is that it will have perpetual existence because its existence is independent of any individual board member and/or shareholder. Though it is a morbid possibility to consider, in the event of a business owner dying—one who has structured their business as a sole proprietorship—the business itself disappears; which is rather inconvenient for investors, employees, and even customers and clients.
This is not the case with a C corp. You cannot dissolve a corporation with this structure until it is intentionally liquidated. Even the sale of shares in the company does not trigger a corporate dissolution; it just means that the ownership has been transferred.
Another possibility to consider is that a business can experience a change of ownership, either fractionally or entirely. If the new owners maintain a sizable controlling share of the company, they can craft policy and marketing changes that guide it in a new direction, even under a new name. But if one active participant in the company steps down and retains a controlling amount of stock, they do not have to worry about the company disappearing even though they no longer oversee the delegation of paperwork and tax filings.
3. By Forming a C Corporation you get Better Fringe Benefits
A C corp offers better fringe benefits, such as more respect in B2B relationships with vendors, suppliers, customers, and clients. A business owner who has structured their operations in such a way is sending a clear signal that they are serious about their business, and the market demand is sizable enough to merit creating an entire legal structure around it.
You might be wondering if such a fringe benefit is worth the headache of creating a business structure, but if you are going to be claiming C corporation status for tax purposes and liability protection, chances are your business has reached the point where outsourcing concerns like talent acquisition, human resources, accounting, and marketing have been outsourced to third parties or turned into internal departments.
Once you reach 100 shareholders, you are legally obligated to evolve the business from an S corporation to a C corporation. But even if you still haven’t developed internal departments, having a registered agent who doubles as a corporate concierge (like the ones at Anderson Advisors) can take this headache away. In return, you’ll be able to operate and present your business as an actual corporation, which can go a long way in terms of building confidence with consumers, investors, and B2B relationships.
4. C Corporations have Tax Advantages
Most C corporations may be able to avail itself of tax breaks that a sole proprietor, limited liability company, limited liability partnership, or even S corp cannot take advantage of. Even so, it’s important to note that a C corp is not a pass through entity, which means that business profits can become subject to double taxation. Once a business reaches the corporate level, the tax rate reaches 21 percent. That money is taxed yet again on the personal tax return of each and every shareholder.
Thankfully, an Anderson Advisor tax expert can work with your corporation to identify ways to minimize the burden of this double taxation, perhaps even making it advantageous on your personal tax return as well.
For example, one of the tax benefits available to C corporations is that shareholders can be given a salary, even if they are not part of running its day-to-day business operations. These salaries can be written off as a business expense, which is a tax advantage that will reduce the corporate income tax the company needs to pay. This type of tax advantage—where shareholders, not just employees, can be put on the payroll—is not available to an LLC or even an S corporation.
One common way of using this C corp tax advantage is to issue bonus payments. However, dividends, such as those stockholders get, may open additional questions about corporate income that becomes subject to double taxation.
To learn more about the tax considerations of each business entity type, sign up for our Structure Implementation Series.
5. Another Advantage to Forming a C Corporation is the Ability to Offer Shares
One of the best benefits offered by C corporations is that it affords the ability of the company to issue shares of stock, which can even be sold on a public marketplace or stock exchange like the NYSE or NASDAQ.
An initial public offering (or IPO) can become a great way for a business to raise capital for the next stage of expansion. It’s this reason that forming a C corp is an attractive option for a healthy and growing business in need of sizable investments. Searching for venture capital can be a time-consuming process, and one that can fall short in comparison to the amount of capital that can be raised with an IPO.
One important consideration for a corporation to keep in mind is that if their company goes public, people with a foundational and/or guiding role in the company will want to retain a controlling number of shares. Otherwise, the company faces the risk of a hostile takeover should one investor purchase enough stock to exert a controlling influence.
Aside from this concern, though, a company that has surpassed 100 shareholders and begins issuing publicly traded stock is essentially issuing voting rights to anyone who wants to buy the stock, which may have some influence on the direction the company takes moving forward—such as electing board members and company policy.
6. Fewer Legal Surprises
Another benefit to forming a C corporation is that you will face fewer legal surprises. This may come as a shock, but corporate law in both the United States and the United Kingdom is quite established. This not only makes it easier to determine the likely outcome of decisions, but it also provides a greater degree of investor confidence.
Over the centuries, pretty much no stone has been left unturned when it comes to parsing out the differences between corporate entities, meaning that the precedents are richly established for issues that can arise between businesses and its clients and customers.
By contrast, operating as a sole proprietor, LLC, or even an S corp can sometimes enter the murky waters of small claims court or arbitrations with little legal precedent to guide the case forward to an amicable resolution.
When Does it Make Sense to Form a C Corporation?
For most small business owners, a C corporation is not always the most advantageous business structure. In fact, more often than not, it makes more sense to form an S corp.
An S corp is a pass through entity where the business profits go to your personal tax return, which helps you avoid paying the 21 percent corporate tax rate on top of your personal income tax. Additionally, an S corp allows you to put yourself on the company payroll, which in turn means you only need to pay self employment tax on the portion of your business income that you claim as personal wages. For business owners running a brick-and-mortar business, like a restaurant or retail venue—or even someone offering consulting services, an S corp makes excellent sense.
But for a technology business that needs to raise capital, or a business that’s already been operating for a while and needs to take things to the next level by hunting for investors, an S corp no longer makes sense.
For instance, imagine a computer programmer and a web designer have teamed up to create an app that allows small businesses to issue rewards to customers. They have tested their app in a few cities, and they want to roll it out across the country. It’s time for this partnership to create a C corp to raise the money they need to get this done; especially if they’re already tapped out on angel investors. They need access to investors, and the best way they can do that is to sell shares. This means turning the business into a C corp.
Another reason to consider a C corporation is if any of the major shareholders are international. This can come with additional rules and regulations, so consulting with a tax advisor or attorney is highly advisable.
C Corporations Are Advantageous for Large, Growing Businesses
A C corporation may not offer the same tax savings that a small business owner could get from an S corporation, but it does offer more flexibility to grow and raise capital. It can also leverage certain tax breaks by taking advantage of business deductions, losses, and payroll taxes. Unfortunately, profits will still be subject to double taxation—that is, taxed at the corporate level and again when each shareholder reports their taxable income.
To find out if a C corporation is the most beneficial business structure for your company, sign up for a free entity blueprint. Our entity formation experts will evaluate your business and assets to determine which entity type will be most beneficial from a tax and liability standpoint. Don’t risk wasting valuable time and money on creating the wrong business structure—schedule a consultation today!
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