What is a C corporation?
A C corporation ( besides known as a “ C Corp ” ) is a legal entity that protects the owners ’ personal assets from creditors. It can have an outright number of owners and multiple classes of stock. These characteristics and early advantages make it a commodity fomite for attracting speculation capital and other types of equity financing. Unlike an S Corporation or an LLC, it pays taxes at the corporate flush. This means it is subject to the disadvantage of double taxation. As well, a C corporation besides must comply with many more federal and state of matter requirements than an LLC .
C corporations provide the following considerable advantages :
- Separate legal identity
- Limited liability for the owners
- Perpetual existence
- Separation between ownership and management
- No restrictions on who can hold shares
- Readily transferable shares
- Well-established legal precedents
- Widespread acceptance by the venture capitalists and other investors
- Ability to offer stock options
- Tax planning opportunities
CT tip: Keep in mind that shareholders can opt out of some of these advantages. For exercise, a pot can provide in its articles of incorporation that it will exist for a specified number of years, there can be agreements to restrict the transfer of shares, and shareholders can agree to be responsible for the corporation ’ mho debts .
What can these C corporation advantages mean to your business?
A corporation is separate from its owners
once formed, a corporation has a animation of its own, with its own rights, capabilities, responsibilities, and liabilities. This means that a corporation can sue ( or be sued ) in its own name. It can buy, own, and use its own real or personal property, make its own contracts and guarantees, lend money and invest funds .
A corporation offers owners limited liability protection
Because a corporation is a freestanding entity, its debts, obligations, and liabilities are it ‘s own. Those who do business with a corporation must look to the ship’s company to satisfy any obligations owed to them, and not to the shareholders. The shareholders ‘ exposure to loss is limited to the total invested in the corporation .
A corporation has a perpetual existence
Because a pot exists individually from its shareholders, it has what ’ south called a ceaseless being. For example, if the owner of a lone proprietorship dies, the commercial enterprise ceases to exist. This international relations and security network ’ t the case with a corporation., once a corporation is formed, it continues to exist until it is dissolved, wound up and liquidated, unless its articles of incorporation provide otherwise. What ’ s more, the transfer of shares of malcolm stock has no shock on the being of the pot .
Free transferability of shares
A plowshare of corporate stock provides both economic and management rights. A stockholder can freely sell those shares and the buyer will become the stockholder with all of those rights. A penis in an LLC can sell his or her economic rights but not the management rights. Unless the engage agreement provides otherwise, the LLC extremity has to get consent from early members to sell the whole interest and have the buyer become a penis .
C corporations are more attractive to investors
One advantage of a C corporation over an S corporation or LLC is that it has an easier time attracting investors, including obtaining capital through equity finance. Owning shares is broadly considered preferable to owning LLC membership interests. besides, venture capitalists prefer to invest in C corporations. And, in fact, many venture capitalists can not invest in S corporations or LLCs because of restrictions in their own govern documents and the tax laws. In addition, companies planning an IPO broadly prefer corporations to LLCs and can not choose S pot tax condition because of the 100-shareholder limit. It may besides be easier for a corporation to obtain bank finance. This factor can be specially significant for capital-intensive businesses .
No restrictions are placed on shareholders
Unless the corporation ‘s governing documents provide otherwise, there are no restrictions on who can own stock in a C corporation. conversely, tax laws restrict who can own stock in an S corporation. For exemplar, individuals who are not US citizens or resident aliens can not own lineage in an S pot. Corporations and LLCs can not be S pot shareholders either. There is besides a 100-shareholder limit for S corporations .
Shareholders do not directly manage the corporation
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Corporations are managed by a display panel of directors who appoint the officers who run the daily operations. This is provided for in every express corporation law. A stockholder is entitled to economic benefits based upon the issue and types of shares owned, but the stockholder does not have the right to manage the daily affairs of the pot. Shareholders ’ management rights are limited to electing directors, removing directors under certain circumstances, voting on certain major structure changes, such as mergers or profligacy, and inspecting certain books and records .
CT tip: Some states have a statutory close corporation law that allows shareholders to manage without a circuit board of directors, but this is a limited exception .
Corporate law is well-established
operate as the oldest type of formal entity can be an advantage because there are few surprises left in bodied jurisprudence. While states struggle to establish what corporate precedents transfer to the LLC, most of the essentials that apply to corporations are well-established. This makes it possible for management to better predict the legal consequences of their decisions and for investors to know the shock of changes in corporate structure, which permits them to draft agreements to protect themselves .
Corporations provide multiple tax planning opportunities
operate as a corporation may involve extra complexity, but it besides provides a across-the-board array of tax plan opportunities across the commercial enterprise life cycle. The tax implications of being a C corporation versus an S pot or LLC should be discussed with a believe tax adviser .
What are the disadvantages of a C corporation?
While there are benefits gained from C pot status, there are some downsides as well. are Two major disadvantages include :
A pot is more complex to operate than an LLC. The corporation laws require more formalities in how a corporation is managed. For example, stockholder and director meetings are required. proper notification must be given, and minutes kept. In contrast, LLCs can be managed more colloquially. Corporation laws besides tend to have stricter record-keeping requirements .
A corporation is a separate tax-paying entity unless it makes an election to be taxed as an S pot. This means a C pot pays corporate income tax on its income, after offsetting income with losses, deductions, and credits. A pot pays its shareholders dividends from its after-tax income. The shareholders then pay personal income taxes on the dividends. This is the often-mentioned “ double over tax ”. however, there are ways to reduce or eliminate double tax income that a tax adviser can recommend.
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Weigh the advantages and disadvantages of a C corporation against your business needs
As you can see, there are advantages and disadvantages to operating as a C pot. Your accountant and lawyer can help you evaluate whether this is a good fit for your business and your emergence plans .
Learn more about how CT can help you select the incorporation type that best suits your company ‘s needs.