C Corporation Benefits and Disadvantages: Everything You Need to Know
As a business structure that has been around for a long time, C corporations (C corps) are popular in the United States.4 min read
2. Advantages of a C Corporation
3. Disadvantages of a C Corporation
The benefits and disadvantages of a C corporation depend on the type of business structure you want for your company. While the benefits of C corporations can prove advantageous, such as allowing an unlimited number of shareholders, there are also some drawbacks that are important to consider before owners form this type of corporation.
What Is a C Corporation?
As a business structure that has been around for a long time, C corporations (C corps) are popular in the United States.
Because C corps are such a common type of company, many business owners and partners will form a C corp without being sure that it is the right structure for their company.
C corps are subject to state laws, so the specific regulations and requirements will vary depending on where the C corp is established.
Usually, businesses with the following responsibilities benefit from forming a C corp business structure:
- Product sales
- Physical storefronts.
Businesses with appreciating assets don't usually do well with the C corp structure because of how these assets are taxed and sold under that particular entity type.
Advantages of a C Corporation
C corps are treated as completely separate from the owners of the company. Therefore, the company itself can:
- Own property
- Form contracts
- Invest and loan money.
The owners of a C corp are well protected from the liabilities or obligations of the corporation. However, owners (called shareholders in a corporation) will not enjoy liability protection if:
- The company funds are misused.
- The shareholders are responsible for defaulting on any company loans.
- The shareholders are using the corporation to commit fraud.
Corporation shareholders can also be held responsible if they cosign a loan for the company.
The C corp business structure also gives the company owners the ability to sue on behalf of the corporation. Derivative suits are lawsuits pursued for the benefit of the corporation, and direct lawsuits are for the benefit of an owner. Usually these happen when dividends are being withheld from a shareholder, or if one of the owners made a poor decision that hurt the corporation in some way.
C corps benefit from their ability to outlive their owners. If the owners or members of a partnership or sole proprietorship die, the company dissolves. However, C corps can continue to function even if founding shareholders leave or die. This characteristic also allows for the ownership of a C corp to change hands easily. Shareholders can buy and sell their company shares to another if they decide to leave the corporation.
Sometimes the buying or selling of a controlling stock in a C corp can put the corporation at risk of dissolving or a lawsuit. Business lawyers can help form a buy-sell agreement to help protect the company in such a situation.
The shareholders of C corps do not automatically have a direct role in the management of the company. Shareholders elect members to a board of directors, and that chosen group manages the corporation. Certain big decisions, like dissolving the company or merging with another, include the votes of all the shareholders. But directors handle the general business decisions.
C corps are allowed to have any number of owners or shareholders, whereas other business entity types, like S corps, are limited to only 100 shareholders. Also, the types of shareholders allowed in a C corp are less restricted than other business structures. For instance, a C corp can have the following as its shareholders:
- Business entities
- Nonresident aliens
- Foreign companies.
With an unlimited number of shareholders allowed, C corps can grow more and at a faster rate than other entity types.
Disadvantages of a C Corporation
C corporations are great options for many business owners. However, they do have some disadvantages to keep in mind when deciding on the right structure for your company.
The record-keeping requirements and other regulations can be a bit overwhelming to the owners of a C corp, whereas other business types are easier to maintain.
One of the biggest disadvantages of a C corp is its taxation. Because C corps are treated as entirely separate entities from their owners, the business profits are taxed once with the company taxes and again on shareholder tax returns when any profits are paid out as dividends.
C corps can be harder to start because they are required to have bylaws and articles of incorporation. Bylaws are meant to cover how the corporation should handle major decisions in the future of the business, which can be complicated and difficult to figure out. C corps can also be difficult and expensive to maintain once they're started because of the many fees and the legal requirements.
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