If you are considering setting up a C Corp, know that a C Corporation is a business structure that is considered to be legally separate from its member-owners.

What Is a C Corporation?

Members of a C Corporation don't have to worry about the company becoming a personal tax liability. However, this type of business structure is more complicated than a limited liability company. All businesses formed as a C Corporation must have both shareholders and a board of directors.

A business structured in this way is required to be registered with the state in which they are conducting business and adhere to all corporate laws in that state. It is highly recommended that you initially establish your business in the state you live in. In most cases, this will be done with your state's Secretary of State office.

C Corporations are considered to be independent entities, responsible for their own taxes and paying special tax rates that are specific to corporate entities. Similar to an LLC, a C Corporation may consist of only a single person, so long as that person is of legal age in their state.

Advantages of a C Corporation

  • In a C Corporation, owners are not held responsible for any financial losses the company may incur. The only financial risk an owner has is their personal investments. This is true for all members of the company, including employees and directors. C Corporations are entitled to a number of special tax deductions. In fact, it is entirely possible for your company to have less than $50,000 in taxable income after claiming deductions. Your salary as an owner, for example, as well as employee wages, are all tax-deductible.
  • A C Corporation is required to include shareholders. This means you have the option to take the company public if you choose to, as well as offering stock and stock options to your employees. C Corporations are not owner based and are continued by the board of directors. That means should anything happen to the founder or owner, the business will continue to operate as normal as long as the board remains in place.
  • Forming your business as a C Corporation provides you with the option of putting a medical reimbursement plan in place. This allows the company to deduct any medical payments, up to a fixed amount set by the corporation, from its income taxes. Additionally, shareholders and employees can be offered these benefits tax-free.
  • If your business requires a large amount of startup or expansion funding, usually more than $5 million, C Corporations have the option of reaching out to venture capitalists for assistance. Most of these investors are particularly interested in contributing to C Corporations due to their flexibility when it comes to making ownership agreements and arrangements.
  • If you are interested in taking your company public for trade on national exchanges like the New York Stock Exchange, your company is required to be organized as a C Corporation. This offers the opportunity for nearly unlimited growth through stock sales. While C Corporations have no limits placed on them regarding the number of shareholders they can have, once the company has a total of 500 shareholders and $10 million in available assets, you must register with the SEC under the Securities Exchange Act of 1934.

Disadvantages of a C Corporation

  • As far as taxes are concerned, C Corporations are much more complex than sole proprietorships and LLCs. You're going to need financial backing, business advisors, and tax advisors to help you set up and maintain a business with this type of structure.
  • In some situations, you may face double taxation. For example, if you issue dividends to shareholders out of company profits, the company is required to pay taxes on those profits and the shareholders will be expected to pay personal taxes on the dividends received. One way to counteract this is if your shareholders are also employees, tax shelter additional profits by offering better medical benefits, dental options, and the like. Another option is to issue bonuses or increase salaries, which the company is allowed to claim as a tax deduction.
  • You will most likely require the assistance of an accountant when filing corporate tax forms and returns. These are extremely complicated and will most certainly require an accountant. The company will also be expected to pay federal taxes no later than March 15 every year, which is a full month before your individual federal taxes are due.

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