Here
is a summary of the major advantages and disadvantages of doing business as a C
corporation.
A C
corporation allows the business to be treated and taxed as a separate entity
from you as the principal owner. A properly structured corporation can protect
you from the debts of the business yet enable you to control both day-to-day
operations and organic corporate acts such as redemptions, acquisitions, and
even liquidations.
In
order to ensure that the corporation is treated as a separate entity, it is
important to observe various formalities required by our state. These include
filing articles of incorporation, adopting by-laws, electing a board of
directors, appointing a resident agent, holding organizational meetings and
keeping minutes thereof. Complying with these requirements and maintaining an
adequate capital structure will ensure that you do not inadvertently risk
personal liability for the debt's of the business.
Since
the corporation is taxed as a separate entity, all items of income, credit,
loss, and deduction are computed at the entity level in arriving at corporate
taxable income or loss. One potential disadvantage to a C corporation for a new
business is that losses are trapped at the entity level and thus generally
cannot be deducted by the owners. However, if you expect to generate profits in
year one, this might not be a problem.
Another
potential drawback to a C corporation is that its earnings can be subject to
double tax—once at the corporate level and again when distributed to you.
However, since most of the corporate earnings will be attributable to your
efforts as an employee, the risk of double taxation is minimal since the
corporation can deduct all reasonable salary that it pays to you.
A C
corporation can also be used to provide fringe benefits and fund qualified
pension plans on a tax-favored basis. Subject to certain limits, the
corporation can deduct the cost of a variety of benefits such as health
insurance and group life insurance without adverse tax consequences to you.
Similarly, contributions to qualified pension plans are usually deductible but
are not currently taxable to you.
A C
corporation also gives you considerable flexibility in raising capital from
outside investors. A C corporation can have multiple classes of stock—each with
different rights and preferences that can be tailored to fit your needs and
those of potential investors. Also, if you decide to raise capital through
debt, interest paid by the corporation is deductible.
Although
the C corporation form of business may seem appropriate for you at this time,
you may in the future be able to change the corporation from a C corporation to
an S corporation, if the S corporation form is more appropriate at that time.
This change will ordinarily be tax free, except that built-in gain on the
corporate assets may be subject to tax if the assets are disposed of by the
corporation within ten years of the change.
If you
have any questions, please do not hesitate to call our firm.