C Corporations, C-Corp

Corporations are separate entities from their owners, who are called shareholders. As a separate individual entity a corporation may be taxed, sued or sue, enter into contracts, and own property. Shareholders elect a board of directors who oversee the major business decisions and policies. Corporations are usually perpetual, that is they do not dissolve or end with ownership changes, such as death or sales of shares. The single reason most business’s incorporate is to give owners limited liability for business debts and most legal issues. This generally means a creditor of the business cannot come after an owner’s personal assets such as a home, car, or personal bank accounts. It also protects the business from personal creditors of the owner.

Other major advantages of incorporating include:

• Flexibility and ease of transfer of ownership (easier to attract investors or partners)
• Corporations have less risk of IRS audit compared to other business structures
• Income splitting, giving a lower over all tax rate to corporation and owners
• Cost of benefits such as retirement plans and medical expenses can be written off as a business expense
• Corporations can raise additional funds through sale of stock, there are no limits on number of shareholders
• You can elect S-Corporation status when certain requirements are met, which enables the corporation to be taxed like a partnership

Disadvantages of a C Corp

Some disadvantages of incorporating include the complexity and extra costs during the year and at tax time, certain formalities must be observed to protect the corporation’s “Veil” of protection around the owner’s personal assets. Some also cite that corporations are subject to “double taxation” that is the corporations profits are taxed to the corporation and then to the share holder when taken out in the form of dividends that are not deductions for the corporation. This is not really a problem for most small corporations as profit is normally paid down to zero in the form of wages to shareholders active in the business or as consulting to shareholders who meet minimum guidelines for number of hours consulting annually.

Overall incorporating a small business is largely done for the valuable limited liability it offers business owners and for the added credibility given to the business by putting Inc, Company or LLC at the end of the name. It helps people (Customers, Suppliers, Lenders, Investors) see you as serious and committed rather than some fly by night that may not be willing or able to follow through on its commitments.

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