Forming a C Corporation: Pros and Cons

C corporations (sometimes called “C corps”) are one of the more formal structural options that you can choose when you organize your business. They offer many unique benefits that you can’t get from the other structures. On the other hand, their formality comes with lots of regulation. Read ahead for a quick overview of the pros and cons of organizing as a C corp.

The basics

A C corp is what most people think of when they hear the word “corporation”. Most large companies are filed under this structure, as it offers the most asset protection and tax related options for business owners. It is also typically the only choice for owners that would like to be taxed separately from their company.  

As is the case with forming any corporation, the process to set up a C corp is rather intensive. Depending on the type of business you’re looking to start and the resources you have for startup, the benefits might make up for the annoyance of completing paperwork or keeping an eye on compliance requirements.

Pros

Here are a few of the benefits of organizing under the C corp structure:

Credibility Presenting your business as a C corp shows your customers or clients that you have completed stringent requirements. It’s a positive message to send—if you can accomplish filing as a C corp, your business likely has the resources and management to run a secure and successful business. Customers and clients will be at ease, knowing they are working with a legitimate organization.

Protection As with many of the formal organizational options, filing as a C corp will protect business owners from personal liability in the event that the business fails. A C corp offers the deepest separation between personal and business assets (and debts).

Raising capital Organizing as a C corp allows you to go public and sell unrestricted stock. It is the only structure that allows this opportunity. Many investors choose to fund organizations that have already met the high standards of filing as a C corp.

Infrequent audits

Since C corps face stringent regulation, they are not usually targeted for auditing. Of course, if there is any evidence of unethical practices, the IRS will investigate.

Tax-deductible expenses

C corp owners are able to deduct more business related expenses than owners of other types of companies. Taking advantage of this perk can have a positive impact on your bottom line.

Ownership transfer and longevity

C corps are never forced to dissolve due to changes in ownership. Also, transferring ownership is extremely simple to accomplish. This is usually completed via the sale or transfer of stock.

Self-employment status

Owners of C corps can also be classified as employees of the same C corp. This allows the owner of a C corp to avoid paying self-employment taxes.

Ownership restrictions

There is no limit to the number of owners, or “shareholders”, that a C corp may have. This makes the C corp a good structural choice for a business that has a lot of growth potential.

Cons

There are of course negatives associated with every business structure. Here are a few things to keep in mind:

Complex filing process All businesses that choose to incorporate must complete a good bit of paperwork. The C corp’s formation requirements are the most stringent. After the paperwork is filed, there must be an initial meeting of the board of directors to decide the details of formation. Then, stock shares must be distributed.

Ongoing compliance requirements In order to remain compliant to the strict governmental regulations concerning C corps, owners must ensure that certain ongoing tasks are accomplished. For instance, a C corp is required to complete an annual report, must hold (and document) documented regular meetings, as well as keep close record of all stock transfers.

Shareholder management Selling shares of stock to the public is a great way to raise funds for a business. This does, however, come at a cost. A C corp must spend time and effort managing the expectations of shareholders as well as on shareholder-related record keeping.

Double taxation A C corp’s profits are taxed separately from the income of the owner. This drawback is sometimes referred to as “double-taxation”.

Formal leadership requirements There are three different formal leadership positions that make up a C corporation: Shareholders, directors, and officers. Each role has its own responsibilities. It is possible that one person may serve in more than one position at once. Managing these roles is sometimes complex.

Swyft can help!

With the help of this quick summary of the pros and cons of the C corporation, you should be more prepared to decide if it’s the right choice for you. Does it sound like a good fit for your business? If so, we can walk you through the process so that you can focus on launching your business. Let’s get started!