C-Corporations: Everything You Should Know
As you begin your journey, one of the most impactful decisions you can make is how to structure your business. You’ll need to decide if you’ll form a pass-through entity such as a partnership, limited liability company, or sole proprietorship. Your other option is to 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 hire outside investors. Paying taxes is also an important consideration, because your business entity can affect how much you owe at year’s end.
The passage of the Tax Cuts and Jobs Act (TCJA) meaningfully changed the way businesses are taxed in the United States. Due to this, many small business owners decided to revisit the idea of forming a C-Corp. However, before assuming a C-corporation is the right business structure for you, consider its restrictions on ownership.
C-Corporations can range from small companies to organizations with hundreds of shareholders and directors. This business structure is unique because it’s a separate legal and taxpaying entity from owners. For this reason, C-Corps tend to be more complex than other business structures. However, they also offer more limited liability protection.
A C-Corporation is established with state authorities and governed by the corporate laws of the state where it’s incorporated. To incorporate, you’ll need to register your business name and file articles of incorporation in your state. In addition, c-corporations pay a fee.
The Pros and Cons of C-Corporations:
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. In addition, they can’t be held liable for any lawsuits brought against the business.
In other words, your personal assets aren’t at risk if your business experiences financial trouble. For many business owners, protecting their personal assets is paramount, which is why they opt for this structure.
Con: Administrative Responsibilities
C-Corporations are required to conduct the following actions:
- Draft corporate bylaws
- Elect a board of directors
- Hold formal board and shareholder meetings.
- Keep accurate minutes from all business meetings
- 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-Corporations hire an outside attorney, accounting firm, or both to assist.
Pro: It’s Easier to Raise Additional Capital
If you plan on seeking outside business financing, most advisors recommend the C-Corporation structure for two primary reasons.
First, most venture capital firms are unable — or 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 established as a C-Corp. This is the only way that it can 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 small business, it’s usually more cost effective to operate from a single state. The average cost to incorporate is about $50 to $500 per state.
In addition, most experts recommend that you incorporate in the state your business is located in. If you’re registered in one state but primarily work in another, you must register as a foreign corporation in that state. By doing this, you can ensure that you’re 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. Therefore, businesses that primarily reinvest their profits can save a significant amount of money in taxes.
Con: Potential for Double Taxation
Since a C-Corporation 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: A C-Corp May Be the Right Structure for Your Business
C-Corporations 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.
Editor’s Note: This post was updated for accuracy and comprehensiveness in February 2021.
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.