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Pros and Cons of Starting a Business as a C Corporation

A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Many companies, including most major corporations, are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations both enjoy limited liability, but only C corporations are subject to corporate income taxation.

Corporations are formed under laws of a state or the District of Columbia in the United States. Procedures vary widely by state. Some states allow formation of corporations through electronic filing on the state’s website. All states require payment of a fee (often under USD200) upon incorporation.

Corporations are issued a “certificate of incorporation” by most states upon formation. Most state corporate laws require that the basic governing instrument be either the certificate of incorporation or formal articles of incorporation.

Many corporations also adopt additional governing rules known as bylaws. Most state laws require at least one director and at least two officers, all of whom may be the same person. Generally, there are no residency requirements for officers or directors. However, foreign aliens have to form corporations via registered agents in many states as an obligation.

Interestingly the pros of a C Corporation often outweigh any perceived cons but irrespective of how attractive and easy to set up a business legal entity or structure is, there are always pros and cons of owning such business status hence the need to weigh your options before choosing a business structure or legal entity for your business. In this article, we will be looking at the pros and cons of owning a C Corporation and they are;

Pros of Owning a C Corporation

1. Owners Enjoy Personal Liability Protection

One of the reasons why people opt for C Corporation when choosing a business structure is the fact that their personal liability is protected at all levels. As a matter of fact, C Corporation provides more personal asset liability protection to its owners than any other entity type.

For example, if a C Corporation is sued, the shareholders are not personally responsible for corporate debts or legal obligations – even if the corporation doesn’t have enough money in assets for repayment.

Please note that C Corporation’s profits, losses and liabilities are tied to the business, not its owners (shareholders). It comes with more complex compliance formalities than the LLC structure, but it also offers the highest level of liability protection for owners of the business.

2. Owners Enjoy Business Security and Perpetuity

Another advantage of C Corporation is that ownership is based on percentage of stock ownership, which offers much more flexibility than other business entity types in terms of transferring ownership and perpetuating the business for the long term.

Even though specific details regarding transfer of ownership depend on the governing agreement in the bylaws and articles of incorporation, ownership of this entity type is often easy to buy and sell. For example, if an owner wants to leave a company, they can simply sell off their stocks. Similarly, if an owner dies, their ownership stocks can easily transfer to someone else.

3. Easy Access to Funding

The fact that it is the norm for most corporations to sell ownership through publicly traded stock means that they can easily raise funds by selling its stock to the general public. Interestingly, this easy access to funding is a luxury that other business entity types don’t have. It is highly beneficial not only for growing a business, but also for saving a corporation from going bankrupt in times of need.

4. Enjoys Some Tax Benefits

Inasmuch as some corporations (C corporations) are subject to double taxation, other corporation structures (S corporations) have tax benefits, depending on how their income is distributed. For example, S corporations have the luxury of splitting their income between the business and shareholders, allowing it to be taxed at different rates.

Any income designated as owner salary will be subject to self – employment tax, whereas the remainder of the business dividends will be taxed at its own level (no self – employment tax).

Cons of Starting a C Corporation

a. C Corporations are Expensive to Form and Operate

Corporations are expensive to form and operate. It might be easy for established corporations to raise capital by selling shares, but forming and maintaining a corporation can be costly. You will likely need a lot of startup capital to get a corporation running, in addition to paying the filing charges, ongoing fees and larger taxes.

When weighing the pros and cons to determine whether a corporation is the right legal structure for your business, consult an attorney and an accountant who are well versed in the implications of creating a corporation. Please note that a corporation is not for everyone, and it could end up costing you more time and money than it is worth.

Before becoming a corporation, you should be aware of these potential disadvantages: There is a lengthy application process, you must follow rigid formalities and protocols, it can be expensive, and you may be double taxed (depending on your corporation structure).

b. The Application Process is Pretty Lengthy

Usually, the overall process of incorporating a C Corporation is often a long one but filing your articles of incorporation with your secretary of state can be quick. As a matter of fact, you will likely have to go through extensive paperwork to properly determine and document the details of the organization and its ownership.

The application process of incorporating a C Corporation requires that you would need to draft and maintain corporate bylaws, appoint a board of directors, create a shareholders ownership change agreement, issue stock certificates, and take minutes during meetings.

c. The Incorporation Formalities, Protocols and Structure Can Be Rigid

Apart from the lengthy application process when it comes to incorporating a C Corporation and of course the amount of time and energy necessary to properly maintain a corporation and adhere to legal requirements. You are also required to follow many formalities and heavy regulations to maintain your corporation status.

For example, you need to follow your bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create annual reports. There are also restrictions on certain corporation types (for example, S – corps can only have up to 100 shareholders, who must all be U.S. citizens).

d. Double Taxation

Double taxation is yet another drawback you would have to deal with if you choose to start a C Corporation. This is so because as expected, most corporations especially C Corporation face double taxation, which means that the business income is taxed at the entity level as well as the shareholder level (based on their percentage of profits earned).

The only way around this is to operate as an S corporation. S Corporation eliminate this problem by only taxing each shareholder on their individual income, not at the entity level.

However, the IRS has been known to pay closer attention to S Corporation and even tax them as C Corporation if their records fail to meet the legal requirements. However, the threat of a double tax can sometimes be mitigated for following certain strategies.