The United States Internal Revenue Service refers to general corporations as C Corporations, the most common legal classification a business can have. According to the United States Census Bureau, there are more than 27 million companies in America across all legal classifications – from LLCs to LLPs to S Corporations to C Corporations and beyond. Not all have employees. Some may be sole proprietorships with little or no taxable income, while others have millions of employees around the world and revenue that dwarfs the budget of some countries.
If you are a small business owner considering taking your company to the next level – if you have done your research and are knowledgeable about the risks and potential payoffs – then forming a corporation may be the next logical step to take.
The Advantages of a C Corporation
When incorporating, you can expect a variety of benefits over other types of businesses. A C corporation:
- Limits liability for directors, officers, shareholders, and employees
- Finds investors through the sale of shares of stock
- Can issue more than one type of stock
- Unlimited number of owners and shareholders, not limited to U.S. residents
- Potentially unlimited lifespan, even if you leave the business
- Can deduct ordinary business expenses, as well as benefits to employees
- Can potentially lower your tax rate by splitting profit and loss between owners and the business
- Lower audit risk
Watch Out for Pitfalls
While a C Corporation does offer advantages and the financial rewards seem enticing, a final note to remember is that, while it gives its owners some measure of limited liability, there are circumstances where you, as the owner, can be held responsible, such as:
- You directly injure someone personally.
- You have personally guaranteed a loan or a business debt, which the corporation fails to repay.
- You fail to deposit taxes that have been deducted from the employee wages by the corporation.
Highs and Lows of C Corporation Taxation
One of the top benefits of a corporation is in the taxes paid. And first amongst the deductibles is health insurance. The cost of an insurance plan for employees is 100 percent deductible, as are any costs to the corporation from a medical reimbursement plan. Other fringe benefits can be deducted as well, such as company cars and employee public transportation passes.
Double taxation, however, may occur for certain members of a C corporation. This happens corporate profits are taxed. After that taxation, they are distributed as dividends to shareholders, and are taxed once more in the process. Dividend distribution is not tax deductible.
For new businesses, a C corporation may involve more paperwork and red tape than an entrepreneur wants to worry about. A C corporation is required to hold formal board meetings, for example, and keep accurate minutes of these meetings. Furthermore, the tax filings for C corporations are generally too complicated or time-consuming for the average businessperson and will require an accountant, an added expense. However, if you are creating your business with the idea of going public and selling shares you must have a C corporation.