C Corporation Liability: Everything You Need to Know
C Corporation Liability is a common issue on business owners’ minds when wanting to form a business. 3 min read
2. Exceptions to the Liability Rule
3. C Corporation: An Overview
4. Advantages of a C Corp
5. S Corp vs. C Corp
C Corporation Liability
C Corporation Liability is a common issue on business owners’ minds when wanting to form a business. But owners are generally not personally liable for the debts and obligations of the business when operating as a C Corporation; however, certain exceptions do exist.
Exceptions to the Liability Rule
There are certain circumstances when an owner can in fact be held personally liable, including:
• If an owner injures a third party
• If an owner fails to deposit taxes that were deducted from the employee’s wages by the business
• If an owner personally guarantees a loan or business debt for the S Corp and the business fails to repay it
• If an owner engages in fraud or another illegal action that results in a loss for the business or someone else
• If an owner treats the corporation as an extension of himself
• If the court deems that the C Corp doesn’t actually exist, then the owner will be held liable for any debts and obligations of the S Corp
C Corporation: An Overview
When a business incorporates, it is automatically treated as a C Corp. A C Corp is viewed as a separate and distinct legal entity. Therefore, if the corporation is sued, then the owners are only liable if one of the aforementioned circumstances is met. However, usually, the owners aren’t personally liable, meaning that their personal assets cannot be touched. This is not the case with a partnership or sole proprietorship.
Furthermore, since the C Corp is viewed as a separate entity, it is taxed at the corporate level. The profits are then taxed again at the personal level if shareholders receive dividends from the company’s profits. In order to avoid double-taxation, the business can elect to be taxed as an S Corp to avoid the tax implication.
Advantages of a C Corp
While there are some disadvantages to a C Corp, i.e. double taxation, there are many advantages to operating as a C Corp. As previously mentioned, the shareholders are generally protected from liability, which is one of the biggest benefits of operating as a corporation.
Other benefits include the fact that a corporation can more easily raise capital than other business structures, such as partnerships or sole proprietorships, because the corporation can sell its stocks. Investors are also more easily obtained since they can earn additional money in the form of dividends.
Another advantage that C Corps have over unincorporated businesses and S Corps is that they can potentially deduct fringe benefits from their taxes as a business expense. Such fringe benefits include life, health, and disability insurance, employee medical expenses, and death benefits. Shareholder/employees – those shareholders who are also employed by the business – don’t have to pay taxes on the fringe benefits they receive from the C Corp.
In order for the corporation to be eligible for fringe benefit deductions, the business can’t offer such benefits only to shareholders; furthermore, a majority of the employees must participate in the benefits offered by the business, usually 70%. Corporations can freely transfer ownership without the risk of automatic termination of the business. Another benefit is the greater credibility for businesses that are incorporated, particularly for potential clients, business vendors, and banks.
S Corp vs. C Corp
C Corps don’t have a limit as to how many shareholders there can be, as opposed to S Corps who can have only 100 shareholders. Once the company has at least $10 million in assets and at least 500 shareholders, it must register with the Securities & Exchange Commission under the Securities Exchange Act of 1934. Foreign nationals can own or invest in a C Corp, whereas S Corps cannot have foreign owners or officers.
Moreover, C Corps can offer different classes of stock whereas the S Corp can offer only one class of stock. This will help C Corps attract additional investors since common and preferred stock can offer a variety of advantages.
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