Is a C corporation the best entity for your business? What are some of the major advantages and disadvantages of doing business as a C corporation?
A C corporation allows the business to be treated and taxed as a separate entity from the owners. A properly structured corporation can protect you from the debts of the business yet enable you to control both day-to-day operations and corporate acts such as redemptions, acquisitions, and even liquidations.
In order to ensure that the corporation is treated as a separate entity, it is important to observe various formalities required by the state(s) in which you are regulated. These include filing articles of incorporation, adopting by-laws, electing a board of directors, appointing a resident agent, holding organizational meetings and keeping minutes.
Since the corporation is taxed as a separate entity, all items of income, credit, loss, and deduction are computed at the entity level in arriving at corporate taxable income or loss. One potential disadvantage to a C corporation for a new business is that losses are trapped at the entity level and thus generally cannot be deducted by the owners. However, if you expect to generate profits from day one this isn’t a problem.
Another potential drawback to a C corporation is that its earnings can be subject to double tax-once at the corporate level and again when distributed to you. However, if most of the corporate earnings will be attributable to your efforts as an employee, the risk of double taxation is minimal since the corporation can deduct all reasonable salary paid to employees.
A C corporation can also be used to provide fringe benefits and fund qualified pension plans on a tax-favored basis. Subject to certain limits, the corporation can deduct the cost of a variety of benefits such as health insurance and group life insurance without adverse tax consequences to you. Similarly, contributions to qualified pension plans are usually deductible.
A C corporation also gives you considerable flexibility in raising capital from outside investors. A C corporation can have multiple classes of stock-each with different rights and preferences that can be tailored to fit your needs and those of potential investors. Also, if you decide to raise capital through debt, interest paid by the corporation is deductible.
Although the C corporation form of business may be appropriate for you at this time, if an S corporation is a better choice at a later day you may be able to convert from a C corporation to an S corporation.
To find out more about the advantages and disadvantages of various entity structures, please Contact Us