Advantages and Disadvantages of a C Corporation: Everything You Need to Know
There are many advantages and disadvantages of a C Corporation, and it is vital for you to know all of the benefits and drawbacks of operating a C Corp.3 min read
2. Benefits of Operating a C Corporation
3. Drawbacks of a C Corporation
Updated October 28, 2020:
Advantages and Disadvantages of a C Corporation
There are many advantages and disadvantages of a C Corporation, and it is vital for you to know all of the benefits and drawbacks of operating a C Corp. Incorporating your business in the first place can provide you with limited liability protection as well as increased credibility to potential customers.
While there are many factors to consider before choosing to operate as a C Corp, it is important to know that you have another option, too. You could choose to operate as an S Corp. Depending on the size of your company, as well as your business objectives, one choice may be better suited for you.
Benefits of Operating a C Corporation
There are many benefits to operating as a C Corporation, and perhaps the most important benefit of all is the fact that C Corps provide shareholders with limited liability in terms of business losses. Since the C Corp operates as a separate and distinct legal entity, the owners and shareholders of the corporation cannot be held liable for losses or liabilities incurred upon the business. Furthermore, if legal action is brought against the C Corp, the plaintiff(s) cannot go after the owners' or shareholders' personal assets.
When thinking about the limited liability benefit, you should know that such a benefit applies to all directors, officers, shareholders, and employees of the corporation.
Other advantages of a C Corp include:
- Easy access to investments. It is rather easy for a C Corp to attract investors, as there can be an unlimited amount of investors in the company. This is unlike the S Corp, which can only have 100 investors.
- The C Corp can also issue an unlimited amount of shares. However, if the C Corp has $10 million in assets and 500 or more shareholders, the company must register with the SEC.
- A C Corp can remain in business after the original owner leaves. This is due to the fact that the corporation operates separately from any and all owners.
- C Corps tend to have greater credibility when obtaining financing as well as working with suppliers and other vendors.
- C Corps can deduct business expenses along with employee benefits during tax season.
- C Corps also have lower tax rates than S Corporations.
- C Corporations can engage in income splitting, also referred to as profit and loss splitting, which simply means that the corporation can split the profits and losses between the business and the owners, ultimately leading to reduced tax rates.
Drawbacks of a C Corporation
While there are many benefits to operating a C Corporation, as mentioned above, there are also drawbacks, as with the operation of any business structure. It is important for you to understand the drawbacks before choosing to operate a C Corp. To some, the drawbacks may outweigh the benefits.
Some of the drawbacks include:
- Double taxation. The C Corp is taxed at the corporate level, and the owners of the company are taxed on dividends paid from the corporation. Therefore, the corporation will pay corporate income tax, and the owners and shareholders will pay personal income tax on such dividends.
- If the business itself doesn’t need to raise capital through shares, then people generally find that operating an S Corporation provides for reduced taxes.
- C Corps are generally regulated more so than S Corporations, as C Corps must hold a number of periodic meetings, including board meetings and regular shareholder meetings. Meeting minutes from each of these meetings are also required to be kept on file.
- Government oversight of C Corps is greater due to the complex tax laws and higher protection provided to owners of such corporations.
- Corporations, both S Corps and C Corps, must pay several state and federal filing fees when incorporating. Further, corporations must abide by both federal and state-level regulations, which could result in the need for professional help, whether it be an attorney or accountant.
- Another drawback to operating as a corporation, whether it be an S Corp or C Corp, is that a corporation must file Articles of Incorporation, corporate bylaws, meeting minutes, certificates of good standing, etc. when incorporating, as well as throughout the life of the corporation.
- C Corps cannot deduct for corporate losses; rather, the losses must be reported on the shareholders’ personal tax returns.
If you need help with learning more about the advantages and disadvantages of a C Corporation, or if you want to form a C Corporation, 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.