The C-Corp: Understanding the Advantages and Disadvantages

If you’re thinking about new strategies to propel your company forward or legally protect your growing business, you might have considered incorporation. A corporation differs from an unincorporated small business in many ways—perhaps most notably, it exists perpetually as its own entity, offering a certain degree of liability protection for owners, or shareholders.

If you want to feel confident about your next move, make sure you do your homework on the different types of corporations—including C-corps, S-corps, LLCs, partnerships, and more—and their behavior under California law. Every business is different, and you may want the assistance of an attorney going forward, but it helps to have some general information. Take a look at the main pros and cons of a C-Corporation before you make your next move.

Advantages

  1. Unrestricted Stock Ownership

If you intend to find investors overseas, or if you expect to have your business grow rapidly, then a C-Corporation might suit your needs. C-Corporations can retain an unlimited number of shareholders with almost no restrictions on the type of investor. Foreign corporations, non-resident aliens, and most other individual and entity categories can hold shares. This is not the case with S-Corporations, which limit the number of shareholders as well as the types.

  1. Separate Ownership and Management

Shareholders have limited rights when it comes to the day-to-day management of a C-Corporation. That’s because corporate management and stock ownership are disassociated from one another, which is not necessarily true in the case of S-Corporations and LLCs. A C-Corporation can generally attract more passive investors, transfer stock shares between shareholders, offer stock options more freely, and receive bank financing more easily. Capital intensive businesses might want to keep this advantage in mind.

  1. Established Legal Precedents

As the oldest and most common type of corporation in the United States, the C-Corporation offers a strong degree of predictability in terms of laws and regulations. Corporate law is well-established in this arena. Any changes to the corporate structure can be supported by years of legal precedent. Investors can rest easy knowing the company will rarely have to navigate uncharted legal territory.

Disadvantages

  1. Double Taxation

Because a corporation exists as its own separate entity, it must pay corporate income tax on its income. Shareholders are then paid dividends from the corporation’s after-tax income, and those dividends are again taxed via their personal income taxes. The corporate profits are essentially taxed twice because of this process, hence the term “double taxation.” Keep in mind that a C-Corporation can elect to be taxed as an S-Corporation, but the viability of this option also depends on the individual requirements of your business.

  1. Additional Formalities and Paperwork

C-Corporations must adhere to a strict set of laws and record-keeping standards, which tend to entail much more paperwork compared to other types of corporations. For instance, the C-Corporation must file its articles of incorporation to establish its existence and outline the bylaws it must observe. Currently, the Secretary of State charges $100 in California in the case of for-profit corporations.

  1. Greater Cost to Operate

The filing costs, fees paid to the state of California, and record-keeping requirements can also make a C-Corporation more expensive to start up and maintain. Additionally, shareholders are not permitted to deduct corporate losses on their personal tax returns. These costs can be diminished in certain ways, but you should take finances into account before choosing your corporation type.

When you’re shaping the future of your business, don’t make any rushed decisions. Have an experienced lawyer assess your situation and help you choose the right type of corporation. The knowledgeable attorneys at Integrated General Counsel would be happy to clarify any concerns that you might have and guide you throughout the incorporation process.

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Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.