All companies that get publicly traded in the United States are C corporations. Even private businesses that want to have more than 100 shareholders need to use this structure of incorporation because of the current regulations that exist in the United States. That’s why this option is the most common structure used by firms today.
Although C corporations operate on a national or international scale, the business itself gets created at the state level. Companies may need to incorporate their business in numerous jurisdictions to have local operations, although most agencies operate directly from their headquarters while having customers come to them instead.
Among the C corporation advantages and disadvantages to consider is the limited tax liability that the ownership enjoys. Most major firms get treated as this structure for federal taxation purposes, but it can also remove some issues with double taxation that can exist.
List of the Advantages of a C Corporation
1. C corporations can attract several financing options.
Investors prefer the structure of the C corporation over any other business structure in the United States. That’s because this is the only option that allows for public ownership of equity. Sole proprietors and partnerships are closed-off to this opportunity under most circumstances, while S corporations offer private ownership options that aren’t very friendly to cash flows. With the option to trade shares on national exchanges or internationally, there is more money to be made from the view of a venture capitalist or angel investor.
2. Tax advantages are available with C corporations.
Shareholders can obtain fringe benefits within the structure of a C corporation without worrying about employee tax obligations. Their earnings get taxed at the regular income level, with earnings also accumulating within this option at a lower tax cost when compared to other structures. This advantage of C corporations makes it easier to approach the idea of scalability, especially when growth opportunities make themselves known.
3. C corporations can provide medical reimbursement plans.
If a business incorporates as a C corporation, then most jurisdictions allow the firm to provide medical reimbursement plans to their workers. The agency can deduct all of the medical payments to a fixed dollar amount that gets set by the organization instead of existing tax laws or the state or local governments. Shareholders and employees can then take advantage of this benefit without worrying about an increase in their taxable income levels.
4. This business structure provides an extra layer of liability protection.
C corporations are a legally separate entity from its public shareholders and other owners. That means the individuals with an ownership stake in the business are not held personally responsible for the business debts that an agency incurs. Unlike a partnership or a sole proprietor, there are no personal assets put at risk unless someone offered a personal guarantee for debt financing. Issues of personal and business books mixing so that a “piercing the corporate veil” issue develops can also cause problems in this area, but these issues are rare in today’s corporate climate.
5. Businesses with a C corporation structure have a lower tax rate.
Companies with a C corporation status pay a 21% tax rate on their business income in the United States. That figure is lower than what the employees might pay for their personal taxes. The goal of this benefit is to provide more opportunities for corporate growth so that additional employment opportunities can develop.
Every business faces a unique set of circumstances that may take advantage of this benefit more often than others, so it is essential to speak with a financial advisor when looking at this option.
6. A C corporation can outlive its initial owners.
C corporations have the ability to exist indefinitely. It functions as a separate entity, even if changes get made to the leadership of the company over time. This structure makes it easy for family members to remain in charge within the C-Suite while enabling shareholders to come and go as needed. The organization continues to function unless paperwork gets filed to disband it for some reason. That means it can provide a more consistent experience over a long-term period than other business structures.
7. C corporations have the authority to issue stock.
The structure of a C corporation in the United States allows this business to issue stock of multiple classifications to potential shareholders. It enables an unlimited number of owners from all over the world to have an equity stake in the company. These shares can get transferred to others, purchased on exchanges, or sold for profit based on the current market price.
C corporations can even issue shares without listing them on a national board or index. Employees can also receive stock options because of this advantage, making it a lot easier to diversify personal portfolios.
8. These companies receive the right to due process.
A C corporation receives all of the rights and protections through the Fifth and Fourteenth Amendments in the United States. That means the business has the right to receive due process and equal protections of virtually any legal proceeding. Most states give these businesses the right to free speech, creating a set of circumstances that treats the company more like a person than a separate, created entity.
9. Shareholders aren’t responsible for the daily operations of the business.
The C corporation structure doesn’t require shareholders to be managers or executives in the organization. Each holder receives a share of ownership based on the percentage of stock that they own from the total amount issued. The C-Suite is responsible for managing the company, keeping it operational, and establishing a hierarchy that creates clearly defined roles and responsibilities. When this advantage works as intended, then it makes the company processes more efficient.
10. Owners can protect their business names through a C corporation.
Incorporating a business using the C corporation structure enables the company’s leaders to reserve that name for exclusive use in every region. Corporations have the right to file for trademarks and copyright-protected items as ways to guard their intellectual property. This benefit allows the agency to use its name and trademarks across the United States and around the world.
Although other company structures can receive a similar benefit, there may not be the same level of protection offered for small business owners across the United States.
11. Some C corporations may qualify for specific tax advantages.
Canadian businesses that follow the C corporation structure receive a discounted income tax rate of 10.5% for their first $500,000 of revenues. Businesses with lower income levels may have even fewer responsibilities because of this benefit. That makes it easier to maximize earnings to grow a company, establish research and development assets, or take care of inventory requirements.
12. The C corporation structure provides a measure of trust for consumers.
Customers are looking for value in the products or services that they buy. This benefit is not always defined by the lowest cost that’s available in the marketplace. Other company structures, such a sole proprietorship, can provide something similar but not always with the same level of history, reputation, or expertise.
Most shoppers prefer to work with companies that have an established history and are not reliant on individualized expertise to produce that value. They want to know that an organization will continue providing what they need, which is more likely from a C corporation than other structures.
13. C corporations permit international directors and officers.
Nevada and Wyoming allow the directors and officers of a C corporation to live anywhere unless federal law prohibits it. Shareholders for these companies can reside in any country based on the same stipulations. That means this opportunity allows a foreign investor to get involved with an American company as a way to grow personal profits. This benefit also eliminates some of the bureaucracy that other investment options require.
List of the Disadvantages of a C Corporation
1. All for-profit companies get automatically classified into this structure.
As a general rule, all states classify companies as a C corporation unless the business elects to classify themselves as an S corporation or an LLC. That means the public designation occurs automatically, opening the door to the potential of selling equity in the business. If the long-term vision of a company is to create public ownership opportunities, then this might not be a disadvantage.
When you want to become an S corporation or an LLC, then there can be some additional paperwork requirements that you need to fulfill.
2. C corporations can experience double taxation.
When the structure of a C corporation finalizes, then the profits from the business get taxed by the government. If profits get sent out through the use of dividends, then those funds get taxed a second time. Organizations don’t receive the option to deduct these expenses if a distribution occurs. Although there are some ways for agencies to reduce their responsibilities under this particular disadvantage, it requires some specific financial planning each year to avoid some unpleasant surprises.
3. There are more administrative responsibilities found in C corporations.
States require their C corporations to hold formal meetings with their board of directors and shareholders each year. Someone must keep the minutes of these events and distribute them upon request. You may need to post them publicly, open your meetings up to anyone who wants to attend, and then fill out the appropriate tax forms that show compliance. This disadvantage can become almost overwhelming for smaller firms that decide to use this structure.
4. It costs more to incorporate under a C corporation structure.
Several filing fees are mandatory when creating a C corporation in the United States. The actual costs vary by state, but the total expense is often more than $1,000. This expense typically comes from personal funding unless there are some early initial backers involved in the business. Then this process may require repetition in each active jurisdiction, so there is a possibility of duplicating it dozens of times.
Several states have reciprocal agreements that reduce this obligation for national or international companies. You’ll want to check on what your responsibilities would be in this area before finalizing your business structure.
5. C corporations may have residency requirements that owners must meet.
Many states require the officers or board members of the company to reside within state borders for their registered company. Some exceptions may apply for secondary state registration, like having a business open a second location in a separate state. This requirement may require individual officers or board members to move to meet this requirement or sell their share in the company.
6. C corporations do not have the right to automatic legal counsel.
Although a C corporation is provided some of the rights that individuals receive in the United States, it is not allowed every freedom. One of the key differences is in the right to have legal counsel. If the organization must attend a court proceeding, then it must produce its own lawyer. An attorney from the public defenders’ office is not granted to companies that are facing legal situations.
7. C corporations can create oversight issues that require resolution.
When numerous shareholders are holding fractional shares of a business, without a clear majority helping to navigate the company, then the officers may not have a structure that provides a measure of accountability. The C-Suite can operate the company without oversight when there are multiple fractional-share owners, relying on their ability to provide dividends or returns to appease instead. This can lead to inappropriate, sometimes criminal actions, by the managers if left unsupervised for too long.
8. The C corporation structure doesn’t allow for company losses to get deducted.
As a sole proprietor or in individual partnerships, any damages taken by a corporation can get deducted from the personal income of the owner. That outcome is not possible with this business structure. That means there are limits to the amount of revenue splitting once can use to limit tax liabilities. There are also no personal tax credits available, something which is open to businesses using other structures.
9. The C corporation structure may not adequately limit personal guarantees.
Just because a business incorporates itself does not mean that lenders will automatically offer lending products. There must be enough assets within the corporation to secure debt financing.
If the assets for the business are insufficient, then lenders will often insist that the owners make a personal guarantee on the debt. There is still personal liability within the ownership for the debts of the business if the company is unable to make its payment obligations with this disadvantage.
Issues with combining personal and corporate finances can also create issues that fall into this disadvantage.
10. It takes extra time to close a C corporation if it isn’t financially viable.
One cannot merely quit corporate functions. The C corporation must pass a resolution of dissolution if the organization is no longer operational. This action creates a public record that must get sent to the state governing authorities where the business was located.
The corporation must also file its tax returns for that final year to ensure full compliance. That is why many small businesses decide to stick with a company structure that offers more flexibility.
11. C corporations do not receive a right against self-incrimination.
Although corporations receive some of the rights and privileges under the Fifth Amendment in the United States, the right against self-incrimination is not one of them. Companies can be compelled to testify against their activities or actions by a subpoena or other legal methods. Owners, managers, and directions must provide all of the requested facts during a court proceeding or risk falling into judicial trouble themselves.
This issue can lead to significant fines that can hurt other employees in the business when owners misbehave. Google is the recipient of the two largest antitrust fines imposed by the European Union in history, receiving a $2.7 billion fine in 2017 and a $5 billion one in 2018. The Royal Bank of Scotland also paid $4.9 billion in fines in 2018.
If you are the only person involved in the daily operations of your business, then a C corporation is probably not the best option to choose for incorporation. Forming an LLC would provide you with the separation of personal and professional finances – assuming that you keep your books separate. Partnerships also fall into this category.
Some companies may be better structured as an S corporation. This option allows for private ownership, but it also limits the number of shareholders to only 100 or less.
These C corporation advantages and disadvantages are essential to consider when
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.