Advantages and Disadvantages of C Corporations

The most common type of corporation is the C Corporation, which is a for-profit, state-incorporated business. Articles of Incorporation are filed and appropriate fees are paid to set it up.

The C corporation is established as a unique business entity,

which takes on a distinctly separate business and tax identity from that of the owners (the shareholders). Separate income taxes are filed (IRS form 1120), and corporate taxes are paid regularly for the business. In return, the business owners are removed from personal liability for debt incurred by the corporation.

Should the business go bankrupt, or be faced with a lawsuit, the owner’s personal assets are protected. This is the most significant reason why many business owners choose to incorporate. Additionally, as a separate entity, a corporation can own property, make business deals, or even sue another business independently of the shareholders.

To establish a corporation, several requirements and formalities must be addressed. For example, a corporation must issue shares to stockholders. In addition, state requirements usually include minutes be taken at shareholder and Board of Director meetings, officer appointments, and specific records maintained, as outlined by the state in which the incorporation documents are filed.

The shareholders have ownership in the corporation, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Corporations must adhere to corporate tax laws and file corporate taxes regularly. While corporate taxes can be higher, initially they may be lower than that of a sole proprietor who is paying a 28 percent rate on his or her personal income tax. The first $50,000 is taxed at a rate of 15 percent.

Advantages of a C Corporation

• The corporation is a separate legal entity, and if it is adequately capitalized and proper corporate formalities are followed, the shareholders should have liability protection from its debts and obligations.
• Corporations can utilize corporate benefit health plans, which often offer better retirement options and benefits than those offered by noncorporate plans.
• 100 percent deductible health insurance is offered for all employees, as well as group term life insurance up to a specified amount per employee.
• If a stockholder dies or wishes to sell out, the corporation still continues.
• It's easier to raise capital as a corporation than as a sole proprietorship or partnership.
• Can offer employees incentive stock plans.

Disadvantages of a C Corporation

• Double taxation. This means that besides paying corporate income taxes, any dividends to shareholders are taxed again at the applicable tax rate.
• Formalities and regulations must be followed very closely in conjunction with the laws regarding incorporating in a specific state. Failure to do so can create a situation where shareholders may be held liable.
• It's costlier to start than a sole proprietorship or partnership.
• It takes more time and effort to maintain.

While the idea of double taxation is very troublesome to many new business owners, it's not usually significant for small businesses, where there probably won't be any large dividend payouts. Rather, the money is paid out in the form of salaries and benefits. As the owner, you can pay yourself a reasonable salary and handle any number of duties in the corporation. By incorporating, you have the luxury of leaving some money in the corporation if you foresee significant personal income from other sources. This way, you can reduce your own personal income tax payments.

Taking the time, making the effort, and paying the additional expenses to incorporate are usually considered worthwhile by a business that foresees potential liabilities and/or seeks investors.

For more information on this topic, also read The Tax Implications of C Corporations as well as Should My Business Be a Corporation, Partnership, or an LLC?