Advantages of a C Corporation: Everything You Need to Know
Advantages of a C corporation are compelling for many owners structuring a new business. 3 min read
2. Creating a C Corporation
3. Advantages of a C Corporation: Limited Liability
4. Corporate Veil
Advantages of a C corporation are compelling for many owners structuring a new business. However, it is important to know the benefits of structuring as a C corporation in order to take advantage of all of the great benefits available to you.
What is a C Corporation?
A C corporation is a regular or traditional corporation. C corporation status is the most common business status in the United States and it has remained the primary way to incorporate a business for more than 500 years. Today, the business entity type is still popular for the same reasons.
The potential for unlimited growth by selling stocks means you are able to attract large investments from wealthy investors. Additionally, there is no limit on the number of shareholders a corporation may have and there are not as many shareholder restrictions.
When it comes to small businesses incorporating, C corporations are often overlooked. Many owners instead decide to receive tax assessments as an LLC or S corporation. However, even with the risk of double taxation and additional state and federal compliance requirements, the drawbacks are often portrayed as being greater than the benefits. This is not always the case, though.
Creating a C Corporation
You create a C corporation by first filing documents to incorporate your business as an LLC or C corporation with the governing body in the state you operate your business — typically it is the Secretary of State (SOS). Therefore, many businesses open in "business-friendly" states with less corporate requirements and lower annual business fees.
C corporation status is the preference of many businesses with:
- A storefront;
- A warehouse;
- Employees who work at a business location;
- Large business assets;
- And, high start-up costs.
No matter what state you incorporate in, C corporations enjoy these advantages:
- C corporations are viewed as separate entities form their owners.
- There is a separation between the management and owners.
- Shares may be sold to raise money for the business.
- Investors, including angel investors, prefer to fund corporations.
- There is limited liability protection for the employees, officers, directors, and members of the C corporation.
- The existence of C corporations is perpetual.
- C corporations have higher credibility with potential creditors.
- There are no limits on the number of shareholders the company may have.
- There is unlimited growth potential.
- The ownership in the company is not restricted to ownership by only U.S. citizens like S corporations are.
The advantages are especially beneficial for companies who are not engaging in any personal services. The IRS taxes personal service corporations (PSC) at a higher rate than their non-PSC counterparts. Some of these benefits include:
- Low initial tax rates, especially on the first $75,000 your company makes.
- Non-PSCs enjoy a fiscal year for accounting purposes if they choose.
- Less audit potential than other business entities.
- A reduction of capital gains taxes under Section 1202 of the IRS tax code.
- You can take a loss deduction in the event that the small business you start fails.
Advantages of a C Corporation: Limited Liability
A corporation is considered its own entity after you form it. It has rights, responsibilities, liabilities, and its own capabilities. Creditors and customers of the corporation may sue the corporation, or the corporation may sue in the company name.
Furthermore, corporations are able to purchase and hold real property. They make their own contracts and agreements and even invest funds in other companies and lend money at times. Asset protection is another leading advantage of incorporating. Due to the fact that a corporation is a separate entity, the owners or shareholders have limited liability for the business they conduct. So, the clients have to go after the company for unsatisfied obligations, not shareholders.
This protects the corporation owners with a "corporate veil." The amount of the investment in the corporation is the extent of exposure to loss the shareholders face. If one of the owners gives a personal guarantee for a creditor, they are personally responsible for the debt. Additionally, there is a possibility that a court may disregard a corporation calling it a "disregarded entity" and this "pierces the corporate veil" of protection.
If you need help with the advantages of a C corporation and maintaining your corporate veil, 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.