C Corp Explained: Is It a Good Fit for a Small Business?

Make no mistake, the decision you make about the type of company you register when first starting your business will have a fundamental impact on how your business grows and how you pay taxes. 

The default option is usually to register your business as an S Corp structure rather than choosing to become a C Corp. However, it can soon become apparent that you may need to switch to a C Corp structure as you embark on a journey of growth and expansion.

It is fair to say that whatever formation option you consider, there are pros and cons attached to each one. One of the most obvious downsides of a C Corp structure is that profits are taxed at both corporate and shareholder level, which creates a scenario where you face double taxation on earnings. This is often one of the main reasons for exiting a domestic C Corp arrangement, but it’s always wise to get professional guidance and weigh up all of the relevant advantages and disadvantages before making a decision that could prove costly, especially from a tax charges perspective.

As you can see, it’s incredibly important to choose the right structure for your small business. With that in mind, here’s a look at what a C Corp is and some key points to consider so that you can make an informed decision as to whether it would be the right fit for your current and future business plans.

C Corp explained

A good starting point would be to have a clear understanding of what a C Corp is and how it differs from an S Corp.

In a nutshell, there are two types of corporations. Your option is to register either a C Corp or S Corp when forming your business. A C Corp is a type of business entity that is created when you take the step of filing articles of incorporation with either your secretary of state or a suitable approved agency.

One of the key reasons why you might want to choose this type of entity is because it creates a clear legal distinction between your liabilities as the business owner and the company itself. When you are a sole proprietor, for instance, the buck stops with you and you are liable as you are not afforded the advantage of limited liability.

What is the difference between C Corp and S Corp?

The key differences between these two distinct legal entities tends to be regarding tax status and ownership.

When you are running a C Corp, the business is liable for corporation income tax, and you, as the shareholder and owner, will be liable to pay income tax on dividends. The structure of a C Corp allows an unlimited number of shareholders, and it also allows any entity to become a shareholder. This can be an advantage if you need to add investors. There is also the option of having multiple classes of stock, which can also be advantageous, as it can be used to control the level of influence and voting power each shareholder has.

If you register your business as an S Corp, this will mean that the business will not pay corporate tax. Instead, it simply acts as a pass-through entity, resulting in the owner being liable for business taxes and personal taxes too. 

You also don’t get the same level of ownership flexibility with an S Corp. You are limited to a maximum of 100 owners, all of whom must be US citizens and not any type of entity. You are also restricted to a single class of stock, which is far less flexible than a C Corp.

At the end of the day, there are certain advantages to becoming an S Corp, and the same can be said with regard to registering as a C Corp. The most obvious advantage to becoming an S Corp is that you will avoid double taxation. All things considered, becoming a C Corp tends to be the better option when your ambitions are to grow your business into a much larger corporation, as the structure gives you the flexibility needed to achieve that aim with the right legal framework in place.

The key advantages of forming a C Corp are:

You enjoy limited liability protection

You get better shareholder flexibility

What are the disadvantages of a C Corp?

As already outlined, despite the fact that forming a C Corp can be viewed as advantageous for a number of valid reasons there are also some drawbacks that you need to be aware of when making your formation decision.

The biggest disadvantage is probably the impact you will feel of double taxation. You need to be prepared for the fact that you will be asked to pay taxes as a corporation and then again in the form of personal taxation. Limited Liability Companies (LLCs) and sole proprietorships have the edge in this respect, as they operate under a pass-through taxation system. This could have a notable impact on the amount of tax you pay overall, which is why it is worth getting professional guidance on whether the other advantages outweigh the obvious disadvantages.

Another key consideration is how complicated it can be to run a C Corp. There is a lot more formality that other business entities don’t need to be concerned with, such as shareholder meetings and delivering an annual report.

Using this basic grounding and information about the pros and cons of forming a C Corp, the next step is to see whether it would be a good fit for your small business, both now and into the future.

When forming a C Corp could be the right thing to do

If you are planning to attract investors in order to help finance your trading and expansion plans a C Corp definitely makes sense. It gives you the ability to introduce capital into your business and account for it in a highly structured way.

You don’t have the same options if you are an S Corp, so if you want to raise money for the business, a C Corp structure makes perfect sense.

If your plans include going public with your business at some point that would also be a very valid reason for choosing to become a C Corp. As the structure allows you to have more than one class of stock this gives you a distinct advantage over having an S Corp. You will be able to issue common and preferred stock, allowing you control voting rights across a range of shareholders.

Another great reason for forming a C Corp would be the clear blue water it provides between the business and your personal assets. A C Corp tax structure makes it easy to create a legal distinction between what is yours and what the business owns and is liable for. This could turn out to be a very shrewd move if the company faces legal challenges at some point. It ensures your personal assets are protected in the face of legal threats to the business.

It is not usually that difficult to pivot from running an LLC to a C Corp, so there is always the option to change your mind if you start your business with a structure that turns out not to be the best fit. However, if you already have clear goals and a long-term strategy in place for exiting the business it makes good sense to start off as a C Corp from the very beginning.

You will also often find that it is easier to attract investors when you have a business that is registered as a C Corp. This is not only because it makes it easier to invest when this structure is in place it also demonstrates that you have clearly thought through your plans and set up the business accordingly.

Getting started

The steps for forming a C Corp are very similar to the process you would follow when registering other types of business entities.

Once you have chosen your business name and checked that it is not already registered you can go ahead with filling the articles of incorporation. After this, you allocate stock to shareholders, who then become the owners of the corporation.

You will be required to file form SS-4 in order to obtain an employer identification number, which will be the reference used for paying taxes and administering payroll, plus other regulatory obligations.

Ultimately, the key takeaway to keep in mind is that running a C Corp is that it is a legal structure that delivers clear separation from the owners and the business itself, which can be useful in any number of ways. This delivers a great advantage as it affords the company the opportunity to issue shares and pass on profits, while limiting the liability of directors and shareholders at the same time.

Now that you have a better understanding of how a C Corp works and what the various advantages and disadvantages are, you will be in a good position to decide if it would be a good fit for your business.

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