Almost all larger corporations and publicly traded companies are C-Corps—and with good reason. C-Corps are standard business entities designed to scale with the business as you grow. While they do require more paperwork to set up and maintain than some other legal business entities, C-Corps are frequently the right choice if you are looking to raise outside investment.
Because of the high level of regulation, however, C-Corps require meticulous attention to both the incorporation documents and ongoing filings. Enlisting a corporate lawyer from Priori Legal will relieve the burden of organizing and filing these documents properly so you can focus on running your growing business.
C-Corps (or C-Corporations) are the standard type of American corporation governed under Subchapter C of the Internal Revenue Code. It is a legal, taxable entity responsible for filing corporate taxes. Under a C-Corp, assets of individual shareholders are shielded from most liabilities and a formal structure governs the corporation.
Advantages of C-Corps
There are many advantages to incorporating as a C-Corp. The following are the three most important to most small business owners:
- Tax Benefits. With a C-Corp, you can accumulate earnings for future expansion at a lower tax cost than with other types of businesses. In addition, all profits and losses accumulate to the company, which means you are only taxed as the owner if you issue dividends.
- Limited Liability. You are generally personally protected from the lawsuits and liens against the company.
- Investor Appeal. If you intend to seek venture capital funding, C-Corps are often the most appealing to investors. Foreign investment is allowed in a C-Corp, unlike in an S-Corp. In addition, you can issue both common and preferred shares without limits, which is important to investors.
Disadvantages of C-Corps
C-Corps do, however, have drawbacks. The following are three of the most important disadvantages to consider before incorporating your small business as a C-Corp.
- Double Taxation. As an owner, you can lose some profit through double taxation, as both the net income of your company and the profits distributed to shareholders will be taxed.
- Higher Costs. You are required to file a number of legal documents with state and federal, and you must comply with all regulations that apply to corporations, which can be quite costly. This is in addition to the additional operating costs associated with having shareholders.
- More Paperwork. When you operate a C-Corp, you must hold regular formal board and shareholder meetings and keep accurate minutes. In addition, there are a number of corporate tax forms that will be necessary to file on a federal, state and local level.
C-Corps, Venture Capital and IPOs
If you plan to eventually go public, C-Corps are traditionally the right legal organization for your startup. Venture capitalist are attracted to the high level of flexibility in making ownership arrangements available to C-Corps. Once you are a public company traded on a national exchange, you almost always must be a C-Corp, so unless you reorganize the company’s legal entity, you must prepare the legal framework early on.
If you do decide to proceed with a C-Corporation, you will need to file a "Certificate of Incorporation" (aka "Articles of Incorporation") in whichever state you choose to form.
Depending on your state of incorporation, number of owners and investors, future plans and the corporate documents your lawyer needs to prepare, the cost of forming an C-corp can vary dramatically. When you hire a lawyer in the Priori network, forming your corporation typically costs anywhere from $300-$3500. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What is the difference between a C-Corp and an LLC?
Unlike C-Corps, LLCs are not corporations; they are unincorporated business entities. While similar to C-Corps, LLCs are have much more operational flexibility and fewer required filings. In addition, LLCs avoid the kind of double taxation that C-Corps face. On the other hand, LLCs are often unattractive to investors and the taxation and accounting requirements can be much more complex.
What is the difference between a C-Corp and an S-Corp?
Technically, an S-Corp is a type of C-Corp subject to special tax exemptions in exchange for certain limitations. Both S-Corps and C-Corps operate in similar manners and have similar corporate structures, but they are taxed differently. S-Corps pay not taxes directly but rather are pass-through entities, while C-Corps are separate taxable entities that file corporate taxes. In addition, S-corps can only have limited numbers and types of shareholders and issue a single type of stock, while C-Corps are not so limited.