If you’re launching a new business venture, you may find yourself wondering which type of company to create—and more specifically, whether a C corporation is the right option for you given your unique situation and goals. There are many advantages and disadvantages of doing business as a C corporation that are important to consider.
What is a C corporation?
As a C corporation, your business is treated and taxed separately from you as its principal owner (unlike with an LLC). This protects you from the debts of business while also allowing you to control day-to-day operations and corporate acts like redemptions, acquisitions, and liquidations.
As an added perk, the corporate tax rate is currently 21%—lower than the highest non-corporate tax rate.
How to ensure your corporation is treated as a separate entity
For your business to be treated and taxed separately from you as an individual, you must follow the legal requirements of your state. For example:
- Filing articles of incorporation
- Adopting bylaws
- Electing a board of directors
- Holding organizational meetings
- Keeping meeting minutes
Compliance with these requirements, along with the maintenance of an adequate capital structure, will keep you from risking personal liability for business debts.
Pros and cons of C corporations
If you’re unsure whether a C corporation is the right legal structure for your business, it’s important to explore both sides of this model.
Advantages
On a tax-favored basis, a C corporation can be used to provide fringe benefits and fund qualified pension plans. While subject to certain limitations, the corporation can deduct various benefit costs (such as health insurance and group life insurance) without negative tax consequences.
When it comes to raising capital from outside investors, a C corporation also offers significant flexibility—it can have multiple classes of stock, each with different rights and preferences that can be tailored to the needs of an individual along with potential investors. For those who decide to raise capital through debt, interest paid by the corporation is deductible.
Disadvantages
Since it’s taxed as a separate entity, all of the corporation’s items of income, credit, loss, and deduction are calculated at the entity level, arriving at taxable corporate profit or loss. This means that, for new businesses, one potential disadvantage of a C-corp is that losses can be trapped at the entity level and not deducted by owners (unless they expect to generate profits in the first year).
Another potential disadvantage is that C corporation earnings can be subject to double taxation: once at the corporate level, and again when distributed to you. That said, this risk is minimal, since most corporate earnings will be attributed to your efforts as an employee and the corporation can deduct all reasonable salary paid to you.
Not sure if a C corporation is the right choice? Contact us.
While a C corporation might be the appropriate choice at this time, you may be able to apply to become an S corporation in the future if it’s more appropriate for your business.
If you have any questions or would like assistance exploring the best type of legal structure for your business, our knowledgeable advisors can help. Contact us to learn more.