Deciding the business and legal structure for your company is one of the most important decisions you will make as an entrepreneur. One possible structure option for businesses is to form a C corporation, or C corp.
There are many benefits of choosing a C corp structure, from limited liability to increased access to funding. While this structure isn’t right for every company, it’s ideal if your long-term plans include seeking out investors, going public or eventually selling your business. Here’s everything you need to know about C corporations.
[Read: What is the IPO Process?]
What is a C corp?
Corporations have a lot of flexibility in how they’re formed, but the most important distinction you’ll probably make is in selecting a tax treatment for your small business. A “C corporation” refers to Subchapter C of Chapter 1 of the Internal Revenue Code. This is the the most common form of corporations, with its owners and shareholders taxed separately from the company, resulting in double taxation. While this isn’t exactly ideal for business owners, owners can reinvest profits at a lower corporate tax rate.
Benefits of starting a C corp
According to incorporate.com, C corps offer unlimited growth through the sale of stocks, and there’s no limit to the number of shareholders a C corp can have.
Becoming a C corporation signifies to others that you expect to see serious growth, which can enhance your business’s authority and credibility.
Additionally, Incfile offered other benefits of forming a C corp, which include:
- Limited liability. Because a C corp is a separate legal entity, the business liabilities are separate from everyone in the company, including directors, officers, employees and shareholders. This doesn’t apply in all instances, such as if corporate funds were misused or if fraudulent acts were willfully committed.
- Independent of owners. Unlike sole proprietorships and partnerships, which can only exist for as long as the proprietors and owners are alive and willing to keep the business going, C corps can exist in perpetuity. In fact, ownership of C corporations is completely fluid because it’s decided by whoever holds the stocks it issues.
- Access to funding. If you need to raise money for your C corporation, holding an initial public offering, or an IPO, where your corporation sells shares of company stock can raise significant funds for your business. Aside from the IPO, you can also issue shares periodically to raise additional funds, although this can lessen the value of the existing shares.
- Credibility. Some of the biggest household names are C corporations. Becoming a C corporation signifies to others that you expect to see serious growth, which can enhance your business’s authority and credibility.
- Unlimited growth. As mentioned above, C corps have unlimited growth potential thanks to the sale of shares of stock.
- Tax advantages. C corporations enjoy the benefit of having tax-deductible business expenses among other tax advantages.
[Read: 3 Things You Need to Know About Filing Your Small Business Taxes in 2019]
Is a C corp right for your business?
With all of the information above, you can decide whether or not a C corp is the right structure for your business. If you’re planning on keeping your business for at least five years and then selling it, a C corporation structure can be very advantageous, especially if you plan on reinvesting the profits back into your business until you cash out. If you’re concerned about personal liability, forming a C corporation can help minimize the likelihood of personal liability by separating and protecting your personal assets from things happening in your business.
However, if you’re looking to keep your business structure as simple as possible, planning on keeping your business as opposed to selling it, or looking to live off of your business’s profits each year, a C corporation is probably not the best fit for your business. Instead, you might consider an S corporation (S corp) or a limited liability company, both of which offer pass-through taxation for the owners.
To learn more about additional business structures and to figure out which one is the best for your business, check out CO—’s business structure guide.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
