Benefits and Disadvantages of a C Corporation: Everything You Need to Know
Benefits and disadvantages of a C corporation must be considered when deciding whether to establish this type of business entity.3 min read
Benefits and disadvantages of a C corporation must be considered when deciding whether to establish this type of business entity. A C corporation is one of the oldest and most common business entities, but they aren't right for every type of business.
Establishing a C corporation limits the personal liability of shareholders to their investment in the business. C corporations are formed at the state level by filing articles of incorporation. While it often makes sense to incorporate in the state where you do business, in some cases it can be more advantageous to form in another state.
C corporation income is taxed at both the individual and corporate levels, a situation referred to as double taxation. For this reason, many businesses opt to form as S corporations, which are not subject to corporate income tax. However, S corps have ownership restrictions that do not apply to C corporations.
A CPA or tax attorney can help you decide whether a C or S corporation is best for your needs. Both types of corporations are owned by shareholders, who elect directors that manage the corporation's overall vision and hire managers and officers that carry out the day-to-day operations.
In most states, C corporations must pay annual franchise taxes and file annual reports or be subject to fines and the revocation or suspension of the license to conduct business. You'll also need to hold annual shareholder meetings and record written minutes.
Personal Service Corporations
A personal service corporation (PSC) is one in the field of law, health, accounting, architecture, engineering, performing arts, actuarial science, or consulting. This type of corporation can flexibly manage their income and use a reimbursement plan for medical expenses.
For example, you can plan the income of a PSC to show a profit and owe corporate income tax in the first year of operation then receive a carryback refund in the second year while operating at a net loss. This can be accomplished with strategic timing of salaries for owner-employees. You can also maximize contributions to retirement plans to take advantage of optimal tax rates.
A C corporation can be combined with other business entities. This is often a strategy to hold personal real or intangible property that can appreciate and cause a tax burden for the C corporation. However, you must avoid establishing a holding company with the primary purpose of avoiding taxation. If this is deemed to occur by the IRS, the agency may allocate the income, credits, deductions, and exclusions of the subsidiary among the C corp shareholders.
After achieving success, many C corporations opt to become an S corporation for 10 years to avoid double taxation on appreciated assets when the company is dissolved or sold. However, C corporations have lower income tax rates for accumulated capital.
Key advantages of the C corporation include:
- The ability to use a fiscal year if your business is not a PSC. This allows more flexible control of salaries and deductions.
- The ability to have any number of both domestic and foreign shareholders.
- The ability to offer more than one stock class.
- Recognition as a global business entity.
- Limited liability protection for shareholders.
- The ability for shareholders to sue on behalf of the corporation.
- Perpetual existence, unlike other business entities that dissolve when an owner leaves or dies.
- The ability to freely transfer shares without restrictions or approval from other shareholders.
- More deductions and tax planning opportunities than other types of business entities.
- Increased credibility among lenders, suppliers, vendors, and customers.
- The ability to enjoy unlimited growth potential by issuing stock to shareholders.
- Access to section 1202 benefits, which allow half of qualified small business stock gain to be disregarded, allowing the balance to be taxed at an effective rate of 14 percent rather than the standard rate of 28 percent. This exclusion is available at both the federal and state levels.
If you need help with deciding whether a C corporation or another entity is the right choice for 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.