C-Corporations: Everything You Should Know
As you begin to implement your vision, one of the most impactful decisions you can make is how to structure your business. Should you form a pass-through entity such as a partnership, limited liability company, or S-Corporation, or form a separate entity like a C-Corporation
This decision depends on several factors, including how much flexibility you want and whether you plan to have outside investors. Taxes are also an important consideration, as the type of entity you form can make a big difference in how much you owe at the end of the year.
The passage of the Tax Cuts and Jobs Act (TCJA) in 2017 meaningfully changed the way businesses are taxed in the United States, leading many small business owners to revisit the idea of forming a C-Corp. However, before assuming a C-Corp is right for your business, you should first consider its complexities.
Here’s What You Need to Know about C-Corps:
C-Corps, which are often referred to simply as corporations, can range from small, privately held companies to multinational organizations with thousands of employees and shareholders. C-Corps are unique because they’re separate legal and taxpaying entities from their owners. For this reason, C-Corps tend to be more complex than other business structures, but they also offer more protection.
A C-Corp is established with state authorities and is governed by the corporate laws of the state where it’s incorporated. To incorporate, you’ll need to register your business name, file articles of incorporation in your state, and pay a fee.
The Benefits and Downsides of C-Corps:
Like any business structure, C-Corps have their advantages and limitations, which you should consider before deciding.
Pro: Personal Liability Protection
According to the U.S. Small Business Administration, C-Corps offer the strongest protection to their owners from personal liability. Because a C-Corp is a separate legal entity, owners and shareholders can’t be held responsible for debts of the corporation or any lawsuits brought against it.
In other words, your personal assets aren’t at risk if your business experiences financial trouble.
Con: Administrative Responsibilities
C-Corps are required to draft corporate bylaws, elect a board of directors, and hold formal board and shareholder meetings. They’re also required to keep accurate minutes from each meeting and file an annual report with the state of incorporation.
In addition, C-Corps must complete a lengthy series of tax forms each year with federal, state, and local officials. Because of the vast administrative requirements and paperwork, many C-Corps hire an outside attorney, accounting firm, or both to assist.
Pro: It’s Easier to Raise Capital
If you plan on seeking outside business financing, most advisors recommend the C-Corp structure for two primary reasons. First, most venture capital firms are unable — or at least unwilling — to invest in businesses that aren’t registered as C-Corps. In addition, if you’re considering taking your company public, it must be a C-Corp to be registered on a national exchange.
Con: It Can Be Expensive
The costs of forming and maintaining a C-Corp can add up quickly, from both an administrative and tax perspective. If you own a new or relatively small business, it’s usually more cost effective to register and operate from a single state, at least initially. The average cost to incorporate is about $50 to $500 per state.
In addition, most experts recommend that you incorporate in the state where your business is located rather than in a state that has more favorable tax laws. If your corporation is registered in one state but primarily conducting business in another, you’ll have to register your business as a foreign corporation in the state where you’re located to be compliant with your state’s tax laws.
Pro: Lower Corporate Tax Rate under the TCJA
Beginning in 2018, The Tax Cut and Jobs Act lowered the corporate tax rate from 35 percent to 21 percent. For businesses that primarily reinvest their profits and don’t distribute them as dividends to shareholders, this reduction can save a significant amount of money in taxes, at least temporarily.
Con: Potential for Double Taxation
Since a C-Corp is a separate taxpaying entity, profits are taxed at the corporate level. However, any dividends distributed to shareholders are taxed again at the personal level — the corporation cannot deduct dividend payments. When appropriate, however, various strategies can be implemented to avoid double taxation.
Conclusion: Determine if a C-Corp is the Right Structure for Your Business
C-Corps offer many advantages, but they’re not right for all businesses. Be sure to carefully weigh all the potential costs and benefits before incorporating. If you’re still unsure, consider forming a pass-through entity initially. You can always convert your business to a C-Corp down the road.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.