Advantages and Disadvantages of C Corporation (C Corp)
C Corporation is the most costly and complicated yet most often chosen business structure. Known for both benefits and downsides, a C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations are the most prevalent of the business structures, which are also subject to corporate income taxation. Like S corporation and LLCs, C Corporation limits investors and firm owners' liability in case of business failure. The following segments elucidate further the notable advantages and disadvantages of C Corporation.
What is a C corporation?
C corporation, also known as “C Corp,” is a legal entity that protects the owners’ personal assets from creditors. Owners in a C Corporation can be unlimited and multiple classes of stock. Unlike an S Corporation or an LLC, it pays taxes at the corporate level. This means a C corporation is subject to the disadvantage of double taxation, essentially complying with other federal and state requirements than an LLC.
What are the Advantages of C Corporation?
Even though forming a C corporation is most costly and difficult in terms of regulations and paperwork, many C corporation business structures are still adapted. The main reason is that it provides strong liability protection to owners. Forming a complete separate business entity, a C corporation has many advantages that attract many entrepreneurs.
1. Personal liability protection
A-C Corporation provides more personal asset liability protection to its owners than any other business format. In case a corporation is sued, the shareholders will not be legally liable for corporate debts or legal obligations.
The debtors cannot seize their personal assets even if the corporation fails to repay the money in investments or asset. Personal liability protection is one of the main advantages of C corporation business.
2. Business Security
Owners can sell off their stocks if they want to leave a company or of if an owner dies, their ownership stocks can easily transfer to someone else. The ownership of C Corporation is based on percentage of stock ownership, where transferring ownership or extending the business is easier than other business formats.
Although transfer-related details depend on the governing agreement specified by the state authority, the ownership of C Corporation is often easy to buy and sell.
3. Access to Capital
Since owners can trade their stocks to sell their ownership, they can also raise funds quickly by selling stocks. This is one of the distinct advantages of C corporation as you don’t have this leverage in other entity types. This not only helps a growing business but also saves a corporation from bankruptcy.
4. Attracting investors
A C corporation is free to sell stock or shares publically without any limit to shareholders' number. Only a C corporation has the liberty to do so since its well-structured and is formed through an agreement. Also, employees can be offered a stock option plan in the C corporation format.
The C corporation retains the profits and losses; The owners or shareholders won’t be taxed unless they receive dividends. You can cut off the expenses incurred in business and employee benefits while filing your taxes on the plus side.
The liberty to split profits & losses between the business and the owners is also one of the distinguished advantages of C corporation. It lets you create an overall lower tax rate; all you have to do is consult an accountant to address your concern better.
What are the Disadvantages of C Corporation?
Where there are some benefits of C corporations, there are also some arguable factors that flare up against it. If your business structure can form under a different legal structure, there can be the following disadvantages of C corporation you may face.
1. Double taxation
The main disadvantage of a C corporation is the "double taxation" due to separate charges on corporate income and dividends. First, the tax is imposed on corporate income; then, it's taxed again when distributed to shareholders. It's impossible to deduct the dividend distributions for a C corporation which can only be overcome using specific strategies.
2. Hefty paperwork
The application process and paperwork have always been a concerning factor among the owners while forming a C Corporation. They are required to hold formal board and shareholder meetings and keep an accurate record of these meetings. The owners have to go through a rigorous process of filing tax forms with Federal or state officials, including corporate taxes, salaries, or employee benefits.
3. Higher costs
C Corporations have to pay several types of state and federal filing fees, following different norms and regulations for each process. Managing these processes may also incur more as the owners may have to hire a professional attorney or accountant. This, in turn, escalates the costs as you may have to waste a lot of time during the whole tax filing process.
Compared to an LLC, a C Corporation is a more complicated type of format to handle. The owner has to deal with the cumbersome tax filing process, the application process, higher costs. For example, for every board meeting to happen, proper notice must be given, and minutes must be kept. On the other hand, LLCs are easy to be managed informally. LLC has laws also which are less stricter and have few record-keeping requirements.
The major difference between a C corporation and other entity types is Double Taxation. As you don’t have to pay taxes on different business entities, you also miss out on some advantages. Protection of Assets is one of the commendable advantages of C Corporation. On the other end, C corps don’t have restrictions when it comes to ownership. Anyone can be the owner of a C Corp, and there can be as many owners as you want.