Individuals who must decide on business entities are faced with a variety of options including corporations, limited liability companies, partnerships, and sole proprietorships. There is also the question of what tax treatment your entity should receive. One of the best ways for individuals interested in selecting a business entity to decide which election to make is to understand the strengths and weaknesses of each choice.
This article will specifically examines the advantages and disadvantages of electing tax treatment under subchapter C of the Internal Revenue Code. Commonly referred to as “C-Corporation,” this type of company is taxed on the profits, and then a second time on income to its owners. [1] You may be asking, “Why would anyone want to pay taxes twice?”
Advantages of a C-Corporation
Generally speaking, some of the key elements that businesses find compelling and beneficial about incorporation as a c-corp—aside from the personal liability protection which is also afforded by other entities—include:[2]
Foreign Investors. C-corporations are often a wise choice for companies interested in foreign investors because electing to be taxed as an S-corporation, with pass-through taxation on income to owners, requires ownership by U.S. residents.[3]
Stock Ownership. In comparison to other business entities like limited liability companies and s-corporations, c-corporations allow ownership of a greater variety of stocks which offers the opportunity for some unique business strategies. [4]
Tax Advantages. This category actually includes a handful of advantages concerning taxation. Two of these advantages include the fact that c-corporations receive health coverage on a tax-free basis and there is no limitation on medical insurance deductibles. [5]
Disadvantages Of A C-Corporation
For most businesses considering incorporation, there are several substantial disadvantages about selecting a c-corporation, which include the following:
Double Taxation. As previously mentioned, the substantial disadvantage to c-corporations is that the business entity is a subject to double taxation. First, taxes are paid by the corporation on the business’s profits. Then, shareholders are taxes on any distributions that are received from the business. As a result, this double taxation might prove unattractive to individuals who are involved with the company.
More Regulatory Complexity. In comparison to other business entities, c-corporations require significantly more time and effort to adhere to strict regulatory requirements. There is very little flexibility in how the company can be structured, and certain corporate standards must be met such as holding regular board meetings, maintaining diligent meeting minutes, and much more. This can be an unattractive prospect for many entrepreneurs, especially those with smaller sized companies.
How An Experienced Florida Business Lawyer Can Help
What may be perceived as an advantage to one entrepreneur may be a drawback for another. Individuals must weigh the various advantages and disadvantages of a c-corporation in light of each business’s individual qualities.
If you are interested in structuring a business, it often proves beneficial to retain the services of an experienced business lawyer who understands the advantages (and disadvantages) of various business structures as they relate to your company’s unique needs and goals. You should always speak with a skilled business attorney like those at Muir & Associates before making a decision. Contact a lawyer at Muir & Associates today to begin deciding how to structure your business entity.
What is the difference between a C-Corp and an S-Corp?
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