C corporation is one of the most common types of entity structure in the US, widely used by big companies like Microsoft or Walmart for its tax advantages and liability protection. A C corporation may carry a number of benefits for business owners, but it also has some drawbacks to be aware of. In this article, we’ll weigh the pros and cons of C corporations so you can make an informed decision for your business.
What is the meaning of C corporation?
In the US, a C corporation usually referred to as a regular corporation, is a kind of for-profit business organization. It is the most common type of corporation and offers the greatest degree of protection to its owners.
Further, this type is well suited for businesses that are large and have a complex ownership structure. If you are planning on selling equity in your company or raising capital from investors, a C corporation may be the right choice for you.
How can a C corporation benefit your company?
There are many reasons why you might want to choose a C corporation for your business. Some of the key advantages include:
- Limited liability protection
One of the key advantages of C corporations in the United States is that shareholders have limited liability protection. They are only responsible for the money they have put into the corporation.
If the company goes bankrupt, shareholders are only responsible for the company’s debts based on the amount of capital invested. This is a major advantage over sole proprietorships and partnerships, which do not offer limited liability protection to their owners.
- Attracting investors
C corporations can also be attractive to potential investors because they offer the possibility of a lower tax rate on dividends paid to shareholders based on Income Tax Treaties the US has signed with other countries.
This lower tax rate helps businesses keep more of their profits and allows them to reinvest those profits back into their businesses. It also encourages businesses to distribute their profits to their shareholders, which can boost stock prices.
- Flexibility in ownership structure
C corporations also offer a great deal of flexibility when it comes to their ownership structure. Unlike other business entities, C corporations can have an unlimited number of shareholders including individuals, other businesses, and even foreign investors,
There are no restrictions on who can own shares in a C corp, which makes them ideal for businesses that are looking to raise capital by selling equity and gives it a lot more freedom than other business structures. For example, S corporations are limited to just 100 shareholders, all of whom must be residents.
- Perpetual existence corporation
This means that C corps can continue to exist even if the owner(s) decide to sell all or part of the company. The sale does not mean the end of the company – it simply changes who owns it.
Unlike other company forms like partnerships and sole proprietorships, which come to an end when one of the owners passes away or sells their share of the business. So, if you wish to maintain your business continuity and stability over the long term, C corp is the best option.
- Free transferability of shares
It can be helpful in attracting new investors and growing the company. Because shareholders can sell their shares to other investors whenever they want, and there is no limit on the number of shareholders that a C corporation can have.
This also allows investors to quickly and easily exit a company if they no longer wish to be involved.
- No direct operations management
The shareholders may not be involved in day-to-day operations or the company’s strategic direction directly. They can vote on important matters such as director elections and major corporate transactions though.
This can help to ensure that the company is run in the best interests of the shareholders, rather than being swayed by personal biases or agendas.
- Retained earnings
For business-related purposes, you can set aside a portion of your profits as retained earnings. The good news is that, depending on the size and scope of your business, or other legitimate business reasons, you can keep up to $250,000 of your earnings without paying taxes on them.
This allows the company to reinvest money back into the business, grow its revenues and assets or even emergencies, and can help keep your taxes lower.
Try out our newly released US Business Entity Tool to determine whether a C corporation is right for your case or not and get a report with all the details.
What are disadvantages of C corporations?
Although there are many advantages to setting up a C corporation, there are also some potential disadvantages that you should be aware of before making your decision. These include:
- Double taxation
One of the biggest disadvantages of C corporations is that they are taxed twice. The company will be taxed on its profits and then the shareholders will also be taxed on any dividends they receive from the company. This can potentially lead to a higher overall tax bill for the business.
- Increased paperwork
Another downside of C corporations is that they are subject to more stringent reporting requirements than other types of business entities. There will be more paperwork and compliance costs associated with running a C corporation.
What is the process of C corporation formation?
After weighing the advantages and disadvantages, you are now curious to learn more about the C-corp formation process to find out whether it is challenging to comply. Here are the six steps that the C corporation incorporation process normally takes.
- Step 1: Choose a name for your C corporation
- Step 2: Appoint a Registered Agent
- Step 3: Draft your articles of incorporation
- Step 4: File your articles of incorporation with the state
- Step 5: Appoint directors and officers for your C corporation
- Step 6: Hold a meeting of the board of directors to establish bylaws for your C corporation
See our full guidelines for setting up a C corporation in the US.
No matter what type of business you are running, it is important to choose the right business entity for your specific needs. C corporations have some advantages and disadvantages that you should be aware of before making your decision. If you are looking for a large and complex ownership structure, the ability to take your business public, or certain tax advantages, a C corporation may be the right choice for you.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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