The C Corporation is the most common business structure used for large companies. It is created by the state, offers owner protections, and incurs obligations which require compliance and certain annual activities. It is a separate entity, which means it can be sued, while it also has the right to sue others.
Almost all publicly-traded companies in the United States are C corporations. Larger corporations with more than 100 shareholders tend to have this structure as well. Sole proprietors and small businesses may also use this business structure if it suits their best interests.
Here are the advantages and disadvantages to consider when looking at the structure of a C corporation.
List of the Advantages of a C Corporation
1. It can attract more financing options.
If you’re thinking about taking a company public one day, then the C corporation structure provides opportunities for financing. More investors are willing to get involved in companies looking to be traded on a national-level exchange if this structure is present. That is because there is more flexibility within the ownership arrangements within the C corporation structure compared to other business opportunities.
2. It offers tax advantages.
Within a C corporation, shareholders are able to obtain fringe benefits without a tax obligation if they are also an employee. Earnings can also be accumulated within this business structure at a low tax cost than other business structures, making it easier for the business to scale upward when there are growth opportunities present.
3. It allows for a medical reimbursement plan.
A C corporation is permitted to deduct all medical payments to a fixed dollar amount, set by the organization, not the government or existing tax laws. Shareholders/employees are then able to take advantage of this benefit without worrying about taxation consequences.
4. It provides a layer of liability protection.
Within a C corporation, the organization is an entity which is legally separate from its shareholders and its ownership. The individuals involved with the business cannot be held responsible for the debts incurred by the company, which provides a level of protection for personal assets that other business structures do not provide.
5. It offers a lower tax rate.
Companies have the option to split profits and losses between ownership and the business to generate a lower overall tax rate. In the United States, the business tax rate in 2019 is expected to be 21%, which would be a lower tax rate than personal income at the same level as well. Every situation is a little different, so a financial advisor familiar with your specific circumstances should be consulted to understand the full tax obligations of your enterprise.
6. It exists forever.
A C Corporation continues to exist indefinitely as a separate entity unless changes are made to the business. For a family business, this structure makes it easier to pass down assets to heirs. When shareholders or owners leave, or even if the shares are sold off, the company continues to exist unless it is purposely disbanded for some reason, such as a bankruptcy. When the power structure of the C-Suite is included with this advantage, this type of business provides more consistency.
7. It can issue stock.
One of the primary advantages of a C corporation is that it can issue stock for shareholders to purchase as a way to raise money. This structure allows for an unlimited number of owners, which makes it easier to transfer ownership of stock through a sale. Multiple classes of stock can be issued as well, with some shareholders potentially having stronger voting rights than others. These stocks can be issued even without a listing on a national board. A C corporation is permitted to offer stock options to employees as well, which can be used as a tool to attract more talent to the company.
8. It may allow for foreign officers and directors.
In Wyoming and Nevada, the directors and officers of the company are permitted to reside anywhere in the world. The shareholders for the company can be from anywhere in the world, though some restrictions may apply based on state or national laws. For a foreign investor, the structure of a C corporation makes it possible to diversify a portfolio without dealing with a lot of administrative red tape.
9. It offers the right of due process.
Under the laws of the United States, a C corporation is protected through the 5th Amendment and the 14th Amendment to the Constitution. Just like an individual, the corporate has the rights of due process and equal protection for every legal proceeding. In most states, there is a right to free speech for a corporation as well.
10. It does not require shareholders to be involved in the operations of the business.
Under the C corporation structure, the officers of the business are responsible for the operations of the company. The shareholders are entitled to their percentage of ownership status for dividends, voting, and similar responsibilities. It is the CEO and the others in the C-Suite who are involved in the daily responsibilities which keep the company operational. The established power structure creates roles and responsibilities which are clearly defined, making the company processes as efficient as possible.
11. It provides a level of confidence for the consumer.
Consumers are looking for value in the products and services which they purchase. Value is not always defined by the lowest cost. Other business structures, including sole proprietors, may be able to provide something similar, but not always with the same level of history, reputation, or expertise. Consumers tend to prefer to work with businesses which have an established history and are not reliant on one person’s expertise or talents to provide that value. They want to know that a business will continue to provide supports, which is more likely from a corporation than other business structures.
12. It may qualify for certain tax advantages.
Depending upon the size of the corporation and its location, there may be certain tax advantages available in this structure compared to other businesses. One example of this is the small business tax deduction that is available in Canada. Once the business is incorporated, the first $500,000 in taxable income is taxed at a rate of 10.5%. For businesses with lower revenue levels, programs like these make it much easier to capitalize profits, helping the company to grow over time.
13. It provides incorporation.
Many contractors will only work with businesses that have gone through the incorporation process. That is because there are liability issues that may be present when dealing with other business structures in a B2B relationship. It is also easier to work more at an arm’s length with an incorporated business than those that are not.
14. It provides protections for the business name.
Once you incorporate your business using the C corporation option, you’ll be able to reserve your business name for use in that state/province for a small registration fee. You also have the option to file on a federal level as a corporation, which gives you the right to use the name throughout the country. Other business structures have the option to use trademarks or similar options to brand their business, but from a pure naming standpoint, they do not have the same protections against name infringement that a corporation enjoys.
List of the Disadvantages of a C Corporation
1. It creates a system where there can be double taxation.
When the C corporation structure is finalized, the profits from the company are going to be taxed. Then, when the profits are sent out in the form of dividends, then they will be taxed again. Companies are not allowed to deduct their dividend distributions. There are some ways to lessen the tax responsibilities found under this structure, though it is something that must be planned for each fiscal year. You must file a personal tax return and a business tax return.
2. It requires more paperwork.
C Corporations are required to hold formal meetings for their shareholders and their board. These meetings must have accurate minutes kept of them and distributed as required. There are several tax forms required of this business structure as well at all levels of government, including tax forms sent to employees for their compensation received. Profit distribution paperwork is required as well. For smaller businesses, the paperwork requirements can be overwhelming.
3. It requires a tighter tax deadline.
In the United States, personal taxes are due by April 15 or the closest weekday to that date. For C corporations, the tax deadline is a month earlier, on March 15. Because of the complicated nature of the filing system, many C corporations find themselves needing to hire or contract with an accountant to ensure their obligations are met.
4. It comes at a higher cost.
To start a C corporation, there are several filing fees which must be paid. In the U.S., each state has its own set of regulations which must be followed when creating a new business. In Washington State, for example, Title 23B RCW requires a $180 fee for an original filing, a $60 fee for the annual report, and various additional fees based on statements, reports, or amendments which must be filed. The total cost may be over $1,000 in some states, while the filing fees may be under $100 in others. There are several legal requirements which must be managed as well, including a requirement to file in multiple states, and pay their registration fees, to have a presence in that market.
5. It may have residency requirements.
Many states require the officers or board members of the company to reside within state borders for their registered company. Some exceptions may apply for a secondary state registration, like having a business open a second location in a separate state. This requirement may require certain officers or board members to move to meet this requirement or sell their share in the company.
6. It does not have the right to legal counsel.
Although a C corporation is afforded some of the rights that individuals receive in the United States, it is not afforded every right. One of the key differences is in the right to having legal counsel. If the company must attend a court proceeding, then it must provide its own attorney. An attorney from the public defenders’ office is not provided to companies that are facing legal situations.
7. It can create oversight issues.
When there are numerous shareholders holding fractional shares of a business, without a clear majority helping to navigate the company, then the officers may not have a structure which provides a measure of accountability. The C-Suite is able to operate the business without oversight when there are multiple fractional-share owners, relying on their ability to provide dividends or returns to appease instead. This can lead to inappropriate, and sometimes criminal, actions by the management team if left unchecked for too long.
8. It has no privilege against self-incrimination.
Individuals in the United States cannot be compelled to testify if they believe that their testimony may be a form of self-incrimination. This right is protected by the 5th Amendment. Corporations, even though they have some status as an “individual” with their structure, are not granted this privilege. They must present all facts during a legal proceeding, whether it implicates their company or not.
9. It doesn’t allow for business losses to be deducted.
As a sole proprietor or in certain partnerships, any losses taken by a business can be deducted from the personal income of the owner. That is not the case with a corporation. That means there are limits to the amount of income splitting you can use to limit your tax liabilities. There are no personal tax credits available to owners either, something which is available to businesses using other structures as well.
10. It may not fully limit personal guarantees.
Just because a business incorporates itself does not mean that lenders will automatically offer lending products. There must be enough assets within the corporation to secure debt financing. If the assets for the business are insufficient, then lenders will often insist that the ownership make a personal guarantee on the debt. If that is agreed upon, then there is still personal liability within the ownership for the debts of the business if the company is unable to make its payment obligations.
11. It takes extra time to close the business.
You cannot simply quit a corporation. The business must pass a resolution of dissolution if the corporation is no longer needed or wanted. This creates a copy of dissolution which must be sent to the governing authorities of the state or province where the business was located. The business must file their tax returns for that final period as well to ensure full compliance. That is why many small businesses opt to stick with a business structure which is different than the C corporation structure.
The advantages and disadvantages of a C corporation may apply to businesses of all size, though the largest corporations tend to see the most benefits. It does take more time, energy, and cash to manage this structure than other business types. It also provides numerous benefits which can only be realized by using this structure.
To know if the C corporation structure is right for your business, consult with a legal professional to discuss these pros and cons with them.