Pros and Cons of a C Corporation

Although it is the mostly costly and most difficult to form in terms of regulations and paperwork, the C corporation business structure is popular because of the strong liability protection it gives its owners. Considered a complete separate entity with a life of its own, a C corporation has many advantages that are attractive to entrepreneurs.

Why decide to form a C corporation?

  • Liability protection: Because the C corporation is legally an entirely separate entity from the owners and shareholders, owners and shareholders cannot be held responsible for any debts of the C corporation or any lawsuits brought against it. In other words, your personal assets will not be affected by the actions of the corporation.
  • Attracting investors: A C corporation can sell stock or shares, either common or preferred — and there’s no limit to the number of shareholders. If you ever plan to go public, you’ll also need to be structured as a C corporation. In addition, the C corporation form allows you to offer employees a stock option plan.
  • Taxes: Because the corporation is a separate entity, the profits and losses of the C corporation are retained for the corporation. Unless you or your shareholders receive dividends, you will not be taxed on the company’s income. Also in your favor, you can deduct business expenses and employee benefits in your tax filings.
  • Lower tax rate: You also have the option of splitting profits and losses between the business and the owners to create an overall lower tax rate. Check with your accountant on the best way to do this for your situation.
  • Perpetual existence: A C corporation will exist indefinitely, even if a shareholder or owner leaves, becomes disabled, dies, or sells off their shares.

Here are some reasons not to form a C corporation:

  • Higher costs: Corporations pay a number of state and federal filing fees, and each state also has its own set of regulations. Dealing with these regulations may require the professional expense of an attorney or accountant.
  • Increased paperwork: Increased regulations and complex rules require a corporation to file a number of documents, including Articles of Incorporation, corporate bylaws, corporate minutes, certificates of good standing, and more.
  • Double taxation: Owners of the corporation pay a double tax on the earnings of the company, and shareholders must pay taxes on the dividends received. However, if the owners take a salary, the corporation is not required to pay tax on the earnings. The payments are considered a business expense.

For more information on filing as a C corporation, visit the IRS website.