California Business Strategy: Advantages and Disadvantages of the “C” Corporation

It’s possible to operate a business without creating a legal entity for it – and many California business owners do exactly that. But if your business is anything  more than a hobby, it’s wise to incorporate. There are many options when it comes to your legal structure, and in this blog entry we look at the advantages and disadvantages of a corporate structure.

  • Personal asset security: When you own a corporation, you have limited liability for outstanding business obligations and debts. Because your personal assets are separated from those of the business, they cannot be seized to pay a debt incurred by the corporation. This is one of the leading advantages of incorporating.
  • Tax flexibility: A small corporation can elect Subchapter S tax status to bypass double taxation of profits and dividends. Tax advantages include being able to write off expenses such as health insurance premiums.
  • Perpetual presence: A corporation can survive changes of management or ownership and even the death of the owner, while sole proprietorships and partnerships generally end if you die or leave the business. When you incorporate, you ensure that the company continues to provide services and employment in the future.
  • Enhanced credibility: When you incorporate, your credibility grows, and can help you reach potential customers and partners.
  • Easier access to funds: With corporations, you can raise necessary capital by selling stock. Banks also tend to prefer loan applications from incorporated borrowers.
  • Easier retirement planning: If you set up as a corporation, it can be simpler to establish retirement funds and plans like a 401(k).

There are some potential disadvantages to incorporation, such as:

  • Double taxation: You risk having your profits taxed at the personal and corporate levels, although this can be avoided with Subchapter S status.
  • More stringent recordkeeping requirements: Corporations are legally required to keep more detailed records.

While there are some drawbacks to organizing your business as a corporation, the advantages almost always outweigh them. Please contact us today if you’d like to learn more!

Integrated General Counsel