C Corporation Advantages: Everything You Need to Know
C corporation advantages have made them a popular business entity worldwide, and these benefits have prompted many individuals to go public with their companies. 3 min read
2. Advantages of C Corporations
3. C Corporations and Shareholders
C corporation advantages have made them a popular business entity worldwide, and these benefits have prompted many individuals to go public with their companies. When choosing a C corporation, you are opting for the most-used and longest-running business structure available.
Information About C Corporations
C corporations and S corporations are granted a charter in the state in which they are organized. Both structures offer limited liability protection. Members of both types must file articles of incorporation with the Secretary of State, and both types are made up of officers, shareholders, and directors.
Companies interested in expansion and companies interested in going public typically look to Nevada or Delaware, known as business-friendly states, to set up a corporation. Business-friendly states tend to have fewer restrictions on internal rules and regulations and in regard to the disclosure of public information.
If you choose to organize in Nevada, you will have access to the top asset protection laws of that state while still doing business in another state. If you choose this type of business structure, annual fees will be due in the two states even though you will have only one corporation.
The letter "C" and the letter "S" that indicate each corporation type are Internal Revenue Codes used for clarification purposes.
Advantages of C Corporations
If you are considering starting a new business, a C corporation offers many advantages. For example:
- Once a corporation is officially formed, it has unique responsibilities, rights, liabilities, and capabilities. For example, a corporation has the right to sue and can be sued. Either would be done in the name of the corporation.
- C corporations have the benefit of making their own contracts and determining guarantees, investing funds, lending money, and buying or owning property.
- Venture capitalists prefer corporations as an investment opportunity. One reason is that the split between the economic rights of the owners and the control of the management structure allows a corporation to make public and equity offerings to investors. It is also easier for stock options to be offered to investors.
- It's easier to attain bank financing when a corporation is involved.
- The operation of a corporation may seem complicated, but structuring a business this way comes with a variety of tax planning opportunities. For example, a small business operating as a C corp may offer stock. If Qualified Small Business Stock is held for a five-year period, any gain derived from the sale of the stock is tax-free.
- The IRS allows C corporations to access and utilize a wider range of expenses and deductions than any other type of business.
For businesses that operate a storefront, have employees, sell products, and/or have a warehouse for inventory, forming a C corporation is worth considering.
C Corporations and Shareholders
Companies doing business with a corporation deal directly with the corporation rather than its shareholders for any obligations due to them. In other words, creditors cannot attach a shareholder's assets to satisfy outstanding debts that the corporation has incurred. A shareholder is only in jeopardy of losing the amount that they invested.
A C corporation is considered to have a perpetual existence. All states have a default rule stating that once formed, a corporation will exist until the state or owners dissolve it. Transferring stock does not affect a corporation's existence.
While shareholders enjoy economic benefits based on the type of shares and total owned, they do not have any input or authority in managing the corporations' day-to-day operations. If the corporation is a closed structure, shareholder management functions are limited to voting on major issues and electing directors. Ownership of stock is separate from corporate management.
Corporations do not have limits on the number of shareholders that can be part of the company. There are also no limits on the types of shareholders a corporation can have. For there to be limits, the corporation would need to define those limits in its bylaws.
Stock can be transferred between shareholders unless the corporation has drafted a buy-sell agreement.
Overseas investments are another advantage for corporations. This is because non-resident aliens, foreign corporations, and other entity types can hold shares in a corporation.
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