Advantage of C Corporation: Everything You Need to Know
The advantage of C corporations is primarily due to the limited liability in terms of ownership. 3 min read
Advantage of C Corporation
The advantage of C corporations is primarily due to the limited liability in terms of ownership. However, there are several benefits to operating a C corporation, all of which should be taken into account when considering what type of business structure you want to own and operate. With that being said, there are also disadvantages to operating a C corporation. Unlike an S corporation or an LLC, there is a chance of more state compliance requirements and double taxation.
Advantages of Operating a C Corporation
• Limited liability is provided for the owners (asset protection)
• Perpetual existence
• Separate legal identity
• No limitations on shareholding capability
• The distinction between ownership and management
• Readily available transferable shares
• Long-standing legal precedents
• General approval by investors
• Availability of restructuring options, opportunities for tax planning and gains from shares that are tax-free by qualified small business stock
This means that the corporation has its own capabilities, responsibilities, rights, and liabilities. It has its own life, meaning that it can either sue or face a lawsuit. It can implore its own name in buying, making contracts, lending money, investments, and owning real property.
Those conducting business with the corporation must take up their owing obligations to the corporation and not the shareholders. The corporation is a separate entity from the owners who have limited liability.
Existence of a Corporation and its Management Structure
• The corporation operates from the oldest formal laws in order to avoid any surprises that may arise from corporate law.
• The state in which the corporation is located, or the owners of that corporation are the only ones that can terminate a corporation.
• A corporation remains in perpetual existence despite the transfer of shares of stock.
• Shareholders don’t have a role in the management of the corporation. Shareholder functions only include voting on major structural changes, like share transferability and electing directors.
• Shareholders get management functions only in close corporation. That is the only time they are allowed to make some governance policies and formalities.
• C corporations allow for an unlimited number and types of shareholders. Only a corporation by law would limit this.
• All gains upon the sale of qualified small business stock are tax-free. This stock is held for at least five years. Shareholders pay tax only on the distributed earnings.
• Shareholders are the company’s stock owners and are responsible for decision areas like electing directors, amending bylaws and articles of incorporation, and approving mergers and sale of corporate assets.
• Directors are the managers who are responsible for making major corporate decisions, electing officers and stock issuance.
• Officers include the president, secretary, and treasurer. They make daily governance decisions.
• Employees are those hired by the managers, who receive compensation for their work.
Hiring Employees for Your Corporation
Corporations easily attract top-notch employees with their fringe benefits and stock options. Unlike unincorporated businesses and S corporations, C corporations deduct fringe benefits from the taxes and treat them as a business expense. Such benefits include:
• Group term life insurance
• Health and disability insurance
• Up to $5000 death benefits payments
• Employee’s medical payments not covered by insurance
Disadvantages of Operating a C Corporation
• Double taxation issues. A C corporation pays income tax on the company’s income since it’s a separate tax-paying entity. Therefore, owners of the C Corporation must pay personal income tax for the profits or losses flowing through the entity. Some ways to reduce double taxation include retaining the earnings of the corporation and making contributions to deferred payment plans
• The complexity of operation. Corporations have to abide by complicated corporate laws since they are governed by state and federal statutes. This means that tax preparers and lawyers need to be hired and regular board of director meetings need to be held.
Rules Governing Distribution
Dividends are distributed on basis of shareholdings. In some states, dividends are only declared when all the corporation's debts are fully paid for, or else the directors would be held liable to the creditors.
If you need help learning more about the advantages of operating a C corporation, or need assistance establishing your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.