Over the past few days, I’ve written a few articles about what an LLC and S Corp are. I now want to discuss what a C Corp is. It is one of the three legal entities that you will open up. So, let’s discuss the advantages and disadvantages and what a C Corporation can do for you.
Before we begin to discuss the advantages and disadvantages let’s discuss what a C Corp is. It is a legal structure for a corporation where the owners, or shareholders, are taxed separately from the entity. With this type of legal entity, the taxing of the profits is both at the corporate and personal levels. Which obviously creates a double taxation situation.
How a C Corp Works
So, the way a c corporation works you will first pay your corporate taxes on earnings before you distribute your remaining amount to the shareholders with dividends. At that point, the individual shareholders are taxed on personal income and dividends they receive from the legal entity.
But one of the main advantages of a C Corp is that though double taxation is an unfavorable circumstance you still have the ability to reinvest profits in the company at a lower corporate tax rate.
Advantages of a C Corp
Now that we have talked about what a C Corporation is and how they work. Let’s quickly discuss the advantages of going with one. There are quite a few advantages to opening up a C Corporation but it has to work for what you are trying to do.
One of the first advantages is that it offers the widest range of deductions and expenses allowed by the IRS. This is especially in the area of employee fringe benefits. With a C Corp, you can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs. That includes the full premiums paid out.
The employees, including you as the owner/shareholder, will not pay taxes on the value of those benefits. That’s pretty crazy when you think about it! If you are in a position to get fringe benefits for your employees, consider restructuring to a C Corp.
Disadvantages of a C Corp
The advantages might seem really cool and absolutely amazing. But there are disadvantages as well. So, let’s discuss them here.
Double taxation is the biggest disadvantage here. The way double taxation happens is when a corporation has leftover profit at the end of the year and decides to distribute it to the shareholders as a dividend. Because this is one of the biggest disadvantages you have to consider this when you are opening up your business.
How a C Corp differs from an S Corp
There is really only one big difference between the two legal entities. The difference is the tax part. C corporations pay tax on their income, plus you pay tax again on whatever income you receive as an owner or employee. An S corporation doesn’t pay tax. Instead, you and the other owners report the company revenue as personal income. So, like I said it all depends on what you are trying to do.
Now that you know what a C Corp is and what it does, it’s now up to you to make the decision. What legal entity you are looking to set up is all up to you. It all depends on what you are looking to utilize the entity for. Once you have decided that go and get that entity set up and start your journey into your new venture!
If you’re looking to get started in either opening up an LLC, S Corp, or C Corp I would start with LegalZoom.