C Corporations: all positive and negative points
Puja Bhardwaj | The CEO Magazine
A C corporation is a business term that is used to describe a unique kind of entity in which profits are taxed separately from its owners as per the subchapter C of the Internal Revenue Code. A C corporation is owned by shareholders, who must elect a board of directors that make business decisions and oversee policies.
There are multiple advantages of operating as a C Corporation:
- The owners of a C corporation do not have to carry a lot of liabilities, as they have limited liability. And, they do not stand personally liable for debts incurred by the business. In this business entity cannot be sued individually for corporate wrongdoings.
- A C corporation is the best way to split the corporate profit amongst the owners and the corporation. It results in overall tax savings. The tax rate for a corporation is less than that for a person.
- A C corporation limits the personal liability of the directors, shareholders, and also employees. In this business entity, the legal obligations of the business do not become a personal debt obligation of any individual working in the company.
- It is a strong positive point of c corporations that if legal action is brought against the C Corp, the plaintiff(s) are not allowed to go after the owners or shareholders personal assets.
- C corporations have easy access to investments. It is rather easy for a C Corp to attract investors, as there is no limit in the number of investors in the company.
- Apart from the governing documents of the corporation, there are no restrictions on who can own stock in a C corporation.
- C corporations can have unlimited number of shareholders from worldwide.
Drawbacks of C Corporations
While C Corporation comprises multifarious merits, as mentioned above, there are some drawbacks as well, like other kinds of business operation. It is important to know the drawbacks before choosing to operate a C Corp.
C Corporations are the perfect option for a business that sells products, has a storefront and employees with or without a warehouse where it keeps its inventory. C-Corps is not suitable for the businesses that want to hold appreciating assets, like real estate, because of the tax treatment on the sale of these assets. Double-taxation is a common issue with C-Corp. It mainly happens when a C-Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The corporation pays taxes on that profit, but once it distributes the profit to its shareholders, those shareholders need have to declare the dividends they gain as income on their personal tax returns, and pay taxes.