The Top 4 Advantages of Forming a C Corporation

Are you a sole proprietor or new to business? Perhaps you’ve wondered about forming a C corporation but were unclear what it is or were wary of the cost and time involved. You are not alone.

The C corporation, or C-corp, is the most prevalent type of corporate entity. We’ll explain what a C-corp is and list the top four advantages of forming one – including how a C-corp protects its owners, the tax advantages, and how it can assist you in raising capital and gaining credibility — and shield you from IRS audits.

What is a C Corporation?

The most common type of corporation, the C-corp, is a legal entity where the owner’s, or shareholder’s personal assets and income are kept separate from the business entity. Should the enterprise fail, incur debt, or be sued, the owner’s and shareholder’s assets are protected. There are exceptions. We’ll discuss more on this below.

Another differentiator of the C corporation is how the business is subject to corporate income taxes. In a C corporation, business profits are taxed at the business and personal levels, creating a double taxation situation. There are solutions to this as we'll discuss.

Lastly, C corporations are given the right to exist in the state where they receive their “charter.” If you decide to take advantage of liberal corporate laws in one state, but do business in another, you’ll have to file for a “qualification” as a “foreign” entity to do business there.

Forming a C corporation may not be for everyone, but here are four benefits C-corps provide you and your business.

C Corporations Limit Personal Liability of Owners

Arguably one of the most important advantages of the C-corp is the personal liability protection it offers business owners. If your C-corp becomes encumbered in debt, creditors are not able to pursue the shareholders' or owners' personal assets.

Why does this matter? For sole proprietorships and partnerships, there is no legal difference between you and your business. You or your partners are essentially the same "person” and your personal assets are at stake if you cannot repay your business debt or other financial obligations.

Here are some other good reasons to become a C corporation:

• Offers a clear distinction between management and ownership
• Exists regardless of management or personnel changes
• Lends credibility to the business when attracting investors
• Shares are readily available, and easily transferable

📌 Pro tip: There are exceptions to C-corp liability protection. If the owners or shareholders engage in nefarious deeds, the C-corp’s liability protections can be voided, called piercing the corporate veil, and owners and shareholders can be held liable.

C Corporations Offer Significant Tax Advantages

After its limited liability protection, a C-corp’s tax advantage is its next best asset. A C-corp is not a pass-through entity, meaning owners and shareholders are taxed separately.

This is not a tax exemption – C-corp earnings are taxed at the corporate level. Dividends are distributed to shareholders who are then personally taxed on this income. This “double taxation” conundrum is why many small businesses utilize the S corporation entity; however, there are a multitude of tax benefits that can lessen or alleviate the double taxation issue.

Corporate tax rates for C-corps were reduced from 35% to 21% in 2018 – which also lowered the tax rate for pass-through income. This tax rate reduction subsequently reduced most individual tax brackets whereby any pass-through income is now taxed at the lower rate. Aside from minimizing your overall tax burden, here are other tax advantages to forming your C-corp:

• Carry profits and losses (P&L) backward and forward. C-corps enjoy more flexibility in determining their fiscal year. Shareholders can move income easily and decide when to pay tax on bonuses, or when to accrue losses, which can significantly reduce a tax bill.
• Salaries and bonuses can be written off. Shareholders of C-Corps can also be salaried employees in their businesses, subject to payroll taxes as well as Social Security and Medicare contributions. However, a C-corp can deduct its share of the payroll taxes. Additionally, a C-Corp can pay employees enough so there’s no taxable income at the end of their fiscal year – within reason.
• Tax-free medical premium deductions and other fringe benefits. As long as the company makes these benefits equally available to all employees – not just its shareholders – a C corporation can deduct medical premiums at tax time. Employees also enjoy these tax-free write-offs for their medical reimbursement plans and premiums, disability insurance, and long-term care.
• Write off your C corporation's charitable donations. C corporations are the only entity that can deduct their contributions to eligible charitable organizations, up to 10% of their taxable income in any given year. You may also carry over any donations above the limit into the next five years.

C Corporations Attract Financing

Investors and venture capitalists prefer the credibility and flexible ownership structure of C corporations. Moreover, some kinds of commercial financing are only available to these types of business entities – like 401(k) business financing also known as Rollover for Business Startups (ROBS).

If you are a sole proprietorship or have an LLC, your options for raising capital are limited – SBA loans and other types of loans may be your only funding avenues. With a C-corp, you could potentially attract investments from venture capitalists, angel investors, or selling stock by going public.

C Corporations Run a Lower Risk of IRS Audit

Lastly, C corporations can take large operating and capital losses, especially critical for startups that may experience cash flow issues or significant losses during infancy. The IRS tends not to scrutinize C-corps for losses, as long as the business can show them for several years running.

Other Types of Corporations

Aside from the C-corp, there are a variety of other corporate entities, some designed for specific industries or professions, with their own advantages and limitations. Here is a brief list:

• Publicly held corporation: A publicly held corporation is also publicly traded on the Stock Exchange.
• Closely held corporation: A small number of stockholders with no public market for its stock.
• Limited Liability Company (LLC): Business income is considered owner’s income and passes through personal taxes.
• S corporation: Limited to no more than 100 shareholders, and only one class of stock. Spouses are treated as a single shareholder.
• Professional corporation: A group of licensed professionals, like attorneys, accountants, or doctors who form a corporation to take advantage of a corporation’s benefits. Shares can only be transferred to another licensed individual in the same profession.
• Nonprofit corporation: Formed to serve the public interest, not the accumulation of profits, nonprofits enjoy tax-exempt status while adhering to the specific requirements imposed on their activities.

For sole proprietors and partnerships, the benefits of transitioning your enterprise into a C corporation business entity may outweigh the risks – and time involved. A savvy business owner can invest these tax advantages back into their business to promote growth and expansion.

Get Help Forming Your C Corporation

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