C Corporation Benefits: Everything You Need to Know
C corporation benefits come in the form of liability protections, higher credibility, and the ability to raise extensive capital from the public.3 min read
2. Dealing with Corporations
3. Corporate Guidelines
4. Corporate Vulnerabilities
C corporation benefits come in the form of liability protections, higher credibility, and the ability to raise extensive capital from the public. C corps tend to get overlooked among small business owners who usually choose an S corp or LLC structure. Double taxation is a drawback of a C corp, but you may view it as a minor negative, depending on your business goals.
Benefits of a C corp to consider include:
- Distinct legal entity from the owners
- Personal asset protections
- Businesses exists in perpetuity
- No ownership restrictions
- Established legal precedent
- Attraction among investors and venture capitalists
- Tax planning advantages: tax-free gains and restructuring alternatives
Due to the divide between ownership and managerial rights, corporations can easily attract passive investors via equity and public offerings, which is one reason why venture capitalists prefer to invest in corporate entities. Also, it is one reason why owners choose to incorporate.
Once created, the corporation can expand to new horizons with a new set of responsibilities, rights, and obligations. As an entity, it may be sued, or can sue using the business name. A derivative lawsuit occurs when the management and directors of a corporation did not implement their authority in a way that fit the interests of the corporation. One example is if officers misappropriated an opportunity that would have enhanced the business.
In addition, shareholders may commence lawsuits. The grounds of a derivative lawsuit usually involve duties for the company, but direct lawsuits stem from individual obligations.
- Note: Common direct suits usually entail dividend payments.
Moreover, corporations may do the following:
- Buy or own personal property or real estate
- Creating contacts
- Issue guarantees
- Dispense loans
- General investing
Dealing with Corporations
Those who choose to conduct business with a corporation should deal with the company itself instead of the shareholders. Creditors may not touch the personal assets of shareholders to settle any obligations or debts. The shareholder’s exposure to risk is limited to the amount he or she has invested in the corporation.
Also, limited liability is not unlimited. For instance, shareholders who guarantee business obligations, or co-sign loans, place themselves at legal risk. Courts may also ignore corporate laws using a tactic called “piercing the corporate veil.” If courts achieve this, creditors can claim an owner’s personal assets.
Piercing the corporate veil happens when the shareholder overrode the business and failed to treat the entity as separate, or the shareholder engaged in corporate malpractice.
Under the default guidelines of all states, a corporation exists until it is dissolved by state authorities or the owners. In addition, stock transfers retain no impact on the corporation’s existence. Other owners will not have to be concerned about the business disbanding if an owner leaves or dies.
One of the benefits of operating as a corporate entity is that ownership in stock is separate from business management. In other words, shareholders must receive benefits based on the percentage share owned in the corporation, but he or she does not any right to manage the daily affairs of the business.
If the business operates as a closed corporation, shareholder management will abilities are relegated to the election of directors and voting on structure changes in the form of dissolution or mergers. In addition, functioning as a closed corporation may allow corporations with fewer shareholders to get rid of governance formalities and rules.
With the structure of a closed corporation comes the direct governance of shareholders, and formalities such as notices and record-keeping mandates no longer exist.
It should be noted that note every state allow closed corporations, and the mandates vary across the states that would permit it. To find out if your business would could accomplish a closed corporation, contact a professional who can give you sound advice on the matter.
Stock shares may be transferred freely from one shareholder to another, unless there is a buy-sell agreement in existence. Ownership transferability may place a business in jeopardy because a shareholder’s creditors may assume rights over the shareholder stock.
Do you need to learn more about C corporation benefits? If so, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the top law school in the nation and will assist you during the C corp filing process, and whether a corporate structure would be the right for your business. Also, they will help you through legal and financial difficulties so you can focus on accomplishing your business goals.