What Are the Benefits and Disadvantages of a C Corp.?

By Laura Payet

What Are the Benefits and Disadvantages of a C Corp.?

By Laura Payet

There are some significant benefits to operating a C corp., including limited liability protections, perpetual existence, unlimited shareholders, and the ability to have outside investors. With that said, there are also some disadvantages, such as double taxation, greater corporate formalities, and additional expenses for operating it.

Coworkers standing together looking at a laptop

Although there may be some differences based on the state laws where a company chooses to incorporate, the following are some of the general benefits and disadvantages.

C Corp. Benefits

The owners are called shareholders, and their ownership interest depends on the number of shares they own. Many benefits of such businesses derive from its existence as a distinct legal entity separate from its owners.

Limited Liability

The primary benefit is that it protects owners from personal liability for the company's debts and obligations. As long as a shareholder does not personally take part in any wrongdoing, their liability for business debts is limited to the amount of their investment.

Perpetual Existence

A C corp. enjoys perpetual existence. Unlike a partnership, or an LLC in some jurisdictions, it is not required to dissolve when an owner dies.

Unlimited Shareholders

They can have an unlimited number of shareholders, unlike an LLC, which can have a maximum of 100. They can also have different classes of shares, which means that shareholders of different classes of shares have unique rights. For example, not all classes of stock may entitle their owners to dividends.

Outside Investors

It is easier to sell or transfer an proprietorship interest, simply by selling shares of stock. Unlike an LLC, transferring ownership interest does not require approval from the other owners. In addition, there is usually a public market for such shares. These factors make it easier for this type of entity to attract outside investment.

C Corp. Disadvantages

Most commentators consider double taxation to be one of the biggest disadvantages, but this may not be as big of a problem as it sometimes appears.

Double Taxation

A C corp. pays federal tax on its income. Thereafter, when profits transfer to shareholders as dividends, the income is subject to individual income rates. In a sense, then, company profits are taxed twice. If it fails to pay dividends in order to escape what is owed by shareholders, it may have to pay an accumulated earnings fee of 20 percent.

However, this may not be too problematic given that the corporate rate is lower than the individual rate that high-earning S corp. owners pay on business profits. In addition, a C corp. enjoys generous deductions for the cost of employee benefits, and the value of those benefits remains tax-free to employees.

Formalities and Expenses

The second principal disadvantage is that the law imposes extensive formalities. First, all businesses must create the articles of incorporation and bylaws. They must also have officers and a board of directors, hold board meetings and an annual shareholders meeting, and must keep accurate minutes of those meetings. Additionally, publicly traded companies must register with the Securities and Exchange Commission, unless they are eligible for an exemption, which requires a registration statement and a prospectus. Finally, depending on the state, a C corp. can be expensive to set up and maintain, with high incorporation fees and annual filings.

If this type of entity seems like the most appropriate option for you, consider the pros and cons identified herein. You should also review the formalities of owning and operating other business structures, including the LLC, partnership, and even a sole proprietorship. Once you're ready, you can review your state's applicable laws to form your corporation.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.