Best Legal Structure for My Business: C-Corp

Posted by: kevensteinberg
Category: Blog, Business Law

What is a C-Corp?

Small business owners often overlook the C-Corporation option (“C-Corp”) when it comes to selecting a legal business structure. Operating as a C-Corporation can provide structural advantages that the S-Corporation or other business formation options such as the LLC cannot. For example, although both the C-Corporation and its shareholders are taxed on business earnings, C-Corps are more attractive to investors and offer limited liability and protection.

Advantages of a C-Corp 

Multiple Tax Planning Opportunities

Although operating as a C-Corporation can involve additional layers of complexity, it also offers multiple tax planning opportunities throughout the business life cycle. For example, you can deduct the costs of:

  • Health insurance for owner-employees
  • Employee-owned vehicles
  • Life insurance plans

A trusted business attorney and accountant should guide you through this process.

Attractive to Investors

C-Corps typically have an easier time attracting investors, including raising capital via equity financing. In general, owning business shares is preferable to owning LLC membership interests as shares have certain value and valuations and membership interests may not . In fact, venture capitalists prefer C-Corporation investments and are sometimes limited to only providing capital to them due to C-Corporation  governing documents and tax laws.

Limited Liability Protection

A corporation is its own entity— its obligations, debts, and liabilities are its own. Parties who do business with a corporation have to rely on the company to satisfy any obligations, not on the shareholders. The shareholders’ exposure to loss is restricted to the amount they invest in the corporation.

Disadvantages of a C-Corp

C-Corps are not ideal for every business formation. Some businesses may not qualify, and others may not receive tax or other benefits by choosing this type of formation. There are some disadvantages that those who want to form a C-Corp should understand, including:

Double Taxing

Usually, a C-Corporation owes corporate income tax on its income after offsetting income with losses, deductions, and credits. It pays its shareholders dividends from its after-tax income. Then, its shareholders must pay personal income taxes on the dividends they receive. This is the often-called “double taxation.” However, there are ways to reduce or eliminate double taxation that a business lawyer can recommend.

Complexity

The operation of a C-Corporation is inherently more complex than an LLC. There are more legal formalities in how a corporation is managed. For instance, the law requires C-Corps to hold shareholder and director meetings, including giving proper notice and keeping meeting minutes. Corporations are also generally bound to stricter record-keeping.

Requirements for a C-Corp

C-Corporations must meet some basic requirements to be legally recognized entities. Serious consequences exist for ignoring these requirements. The requirements include:

  1. Investing a minimum amount for your C-Corp
  2. Hold an annual meeting for directors and shareholders 
  3. Accurately record meeting minutes
  4. Keep a record of the directors’ votes during corporate meetings
  5. Keep a list of your company’s owners and their percentage of  ownership
  6. Corporate bylaws and keep a record of them
  7. File documents yearly, including financial statements, annual reports, and financial disclosure reports

How to Form Your C-Corp

  1. Choose and register an unregistered business name (i.e. a name which has not already been taken)
  2. File the articles of incorporation with the Secretary of State according to the laws of the  state of incorporation.
  3. Issue stock certificates upon the creation of the business
  4. File Form SS-4 to obtain an employer identification number (EIN)
  5. Establish a board of directors that will oversee management and the operations

Forming a C-Corp can have several benefits. However, it is essential to consider the advantages and disadvantages of many different business formations before determining which direction you want to take your business. You may also want to consider the following types of formations, each of which are discussed in this series of discussions from Steinberg Law:

  • S-Corps
  • LLCs
  • Sole Proprietorships
  • Partnerships

The right choice for your business will depend on several factors, some of which you may not have even considered. It is best to meet with a business attorney for advice before taking steps to form your business. Steinberg Law has decades of experience addressing various aspects of businesses and is well poised to  assess your business needs,  future goals and put you and your company in the correct position to achieve business success. We know your best  options and the various ins-and-outs of business formation and operation. With Steinberg Law at your side during this process, you will be assured to be on the right path to success.

Author: kevensteinberg