Entity selection is a topic which we will continue to spend considerable time and energy discussing in the present and foreseeable future. The simple reason for this is because proper entity selection has great significance for business owners. If you select an entity which isn’t right for you and your situation, this decision can have very negative consequences.
Recently, we discussed some of the benefits of forming an LLC. As we saw, there are clear reasons as to why businesspeople should consider forming an LLC in certain circumstances. In this post, we will discuss the ups and downs of C corporations. C corporations have some strong advantages, but they have disadvantages as well. Let’s explore this topic in a bit of detail.
Ups: Investor Attraction & Unlimited Shareholders
One of the big perks of establishing a C corporation is the fact that these entities are ideal for attracting outside investors. The reason for this is because these entities can offer different classes of shares, and because investors may hail from anywhere in the world. Certain classes of shares may provide distinct advantages, and this can be a source of attraction for investors.
Another big advantage of C corporations is the fact that C corporations can have an unlimited number of investors, from anywhere in the world. There is no limit on how many investors may participate, nor any regulation about the location from where investors may reside. This makes C corporations an ideal vehicle to have when you take your business public.
Downs: Double Taxation & High Formation Requirements
Probably the most significant downside of C corporations is double taxation. Because C corporations are subject to corporate income tax, the income generated by C corporations is taxed twice before it actually reaches the hands of shareholders. C corporation income is taxed at the entity level, at the corporate income tax rate; then, when the income is transferred to shareholders in the form of dividends, it is taxed at the applicable capital gains tax rate. Hence, the income is doubly taxed, and this is something which deters many people from creating C corporations.
However, even though double taxation can seem like a big drawback, readers should keep in mind that C corporations are eligible for many tax deductions which aren’t available to other entities. And these tax perks can often counterbalance the financial impact of double taxation.
Another drawback of C corporations is the fact that these entities have relatively high formation requirements when compared with other entities. With C corporations, not only will the creators have to develop an original name, file incorporating documents, obtain an EIN, and meet other minimum requirements, they will also need to draft a more thorough operating agreement. The operating agreement will need to address all of the myriad complex issues which pertain to these entities, such as classes of shares, annual meetings, bylaws, procedures for board of directors, and so forth. Simply put, these entities are in some ways more sophisticated than other entities, such as LLCs, and this means that the formation and management requirements are higher.
Contact the Trembly Law Firm Today
Although C corporations have the drawback of double taxation, these entities can still be very appealing for many reasons. If you’d like to learn more about C corporations, entity selection, or if you’d like to incorporate a company right away, give the Trembly Law Firm a call today at 305-985-4582. Our business lawyers can help you get up and running.