What is a C-Corp? Everything you need to know
The most important business decision for entrepreneurs is the business structure. What kind of business should I start with? A corporation – aka a C corporation – is a popular choice as it is more secure for the owner and can provide the greatest liability protection. C Corps are among the most popular types of corporate structure. Find out more information on C corporation here.
So you're starting a new business - congratulations! You have a lot of work ahead of you, however, it is important to remember this is an exciting time for you and your business. One of the first decisions you'll need to make is what entity type to use for your business. There are several different types of entities to choose from, but two of the most popular are C Corporations and Limited Liability Companies (LLCs). In this blog post, we'll discuss the differences between C Corps and LLCs so that you can decide which is right for your business.
What does C corp stand for?
"Corporation" means a "corporate entity." The “C” comes from the tax code on corporations. The Internal Reveue Code (the laws on US Taxation) is split into a number of different subchapters. The laws around taxing a C corporation are found in Subchapter "C", which is where corporations get the name "C Corporation" from.
What are the characteristics of a typical C corporation?
The basic characteristics of a C Corporation include limited liability, perpetual existence, the separation between ownership and management, and separate legal identity, to name a few. One key characteristic, the separation between ownership and management, is particularly appealing to many companies looking to take on outside investment because it allows the company's founders to continue running the business while giving investors a piece of the pie. Additionally, because a corporation has limited liability, the company's shareholders are not held personally liable for any debts or liabilities incurred by the business. This is a major advantage over other business structures.
What is the difference between LLC and C Corporation?
Another common form of entity in the U.S. is the limited liability company. LLCs are a newer type of business entity and offer some features that are similar to corporations, but there are also some key differences. One major difference is that, unlike a corporation, LLCs benefit from pass-thru taxation. What this means is that the owner of the entity will be responsible for the taxes of the business.
Similar to C Corporations. However, LLCs also offer limited liability protection to their owners. This means that the LLC's members will not be held liable for any debts or liabilities of the business. LLCs are flexible entity types that can offer many of the upsides of C Corporation without the downsides of double-taxation that typically comes with a C Corporation.
When to incorporate as a C corporation?
In certain scenarios, incorporation as a C corporation can be an advantageous business decision. When choosing a business entity, it is always best to consult with your attorney and accountant to create projections and map out a plan based on your wants and needs, this could include the impact of income tax, the number of shareholders, and the internal revenue code at that time.
Typically, the best time to incorporate as a C Corporation is when:
When you desire protection
A key benefit of C Corporations is limited liability. This means that the shareholders of a C Corporation will not be held liable for any debts or liabilities of the business. This is a major advantage if you're seeking outside investment or in a high-risk industry. With limited liability, it makes it nearly impossible for a creditor or injured party to sue or collect damages from the owners of the company.
When you want your business to last
C Corporations are perpetual. This means that shareholders of the company can come and go and it does not impact the existence of the business. Think about the last time your purchased Apple or Amazon stock. Apple or Amazon didn't have to dissolve their businesses when you purchased the stock; they won't have to dissolve their businesses if you sell your shares. The business can continue on without regard of the ownership of the company.
In contrast, LLCs are considered partnerships for tax purposes. This means that if one of the members dies, a member wants to sell their interest in the LLC, or some other event occurs that causes a partner to leave the LLC, then the LLC itself "terminates" for tax purposes and is re-incorporated as a new partnership with the remaining partners. This can be be an administrative headache for business owners that now need to file taxes for the entity when the older partner leaves, distribute profits and issue K-1s.
Who owns a C corporation?
C Corporation owners are the shareholders who own stock in companies. In contrast to traditional structures which limit shareholder participation, the C corporation can attract unlimited numbers of investments. Unlike some other entity types, like S Corporations, C Corporations can have different classes of stock, which is attractive to outside investment that want to protect their interests in the business.
In addition to owning the company, shareholders also participate in the management and direction of the company through the election of a Board of Directors. The Board of Directors appoints the officers who manage the company's day-to-day operations. In other words, if you own stock in Apple, Amazon, GM, G&E or any of blue chip company, you have a say in how the company is run!
Is a C-Corp right for me?
If you want to grow your business and take on outside investment, a C Corporation could be an attractive choice for an entity.
Ultimately, it is best to consult with your attorney and account to weigh the pros and cons of each type of business entity to make the best decision for your business.
Alternatives to consider
Although common, C-Corps may not be the best decision for your new business. Here are some alternatives to consider:
LLC
An LLC combines the ease of operating a partnership with the increased security and protection of the corporate structure.
The concept of an LLC is newer, and as a result, there is not as much case law out there to help business owners understand how they work and to provide protection in the event of litigation.
Generally, LLC members have limited liability, similar to C Corporations. Additionally, LLCs can create different classes of membership for the partners, which can be particularly attractive when starting a small business with different investors.
Sole proprietorship
Depending on the business's structure, a sole proprietorship may be the most appropriate choice given all the circumstances. A sole proprietorship is simply when a person holds themselves out to do business. You acquire an EIN, open a bank account, and report all taxes on Schedule C of your federal income tax return.
A sole proprietorship can be the simplest structure in one-owner businesses, reducing regulatory burdens and ensuring maximum flexibility for the owner. However, there is not a separate entity created for a sole proprietorship, it is simply the owner doing business. As a result, the owner has unlimited personal liability for the debts of the business. It is always recommend that you consult with a lawyer before deciding to operate as a sole proprietor for tax purposes.
S-Corporation
Like a C- corporation, an S Corporation (or S-corp) has shareholders, directors, and officers who follow corporate rules and have similar personal liability protection. An S-corp has the advantage of avoiding double taxation compared with a C-corp. Generally, an S -corp combines the tax advantages of partnership and protection from corporations like an S -Corp. There are, however some disadvantages of an S Corporation. Namely, as an entity type, they are not as flexible as C Corporations when it comes to shareholder classes and the number of shareholders the company can have.
Partnership
Partnerships are the most flexible form of entity. Both the rules surrounding taxation and legal protections are very broad and it takes great care to create an entity that meets all the owners' needs.
A partnership is created when two or more people come together to operate a business. The owners of the business share in the profits and losses. Depending on how the entity is created, there may or may not have unlimited liability for the partners.
Before creating a partnership it is always recommended to work with an experienced attorney to consider all the possibilities that come along with this entity type.
Bottom Line
There is no ideal business or tax structure. There are several considerations and decisions to be made when starting a new business and selecting an entity. Before starting your business, it is best to work with a licensed professional to ensure you consider all your options and do not make any costly mistakes. Although most mistakes can be fixed, it is often expensive, and you may be at the mercy of your business partners. Regardless of what type of business you choose to start, it is imperative that you weigh the pros and cons before you make one of the most critical decisions for your company.
We can help you
We have worked with multiple founders and small business owners to start their businesses successfully and without hassle. Our team can help you decide what business structure is best for your needs and get everything set up quickly so that you can focus on running your business. Our no-nonsense approach allows you to consider all angles of your business to ensure it will work when needed.
Don't put off starting your dream business any longer; call me today at 248-522-6772 to get started on protecting your business! Contact us today to get started!
Are you ready to start your business? Contact us today to get started at info@michiganvirtualattorney.com.
Disclaimer: The contents of this site are for general purposes only and do not constitute legal tax or accounting advice. You need to get specialized advice from a qualified professional.
