C Corp

The Key Benefits of Creating Your Own Business Entity

If you run a business as a sole proprietor under your own name, or a DBA, but have yet to legally form a business entity then you’ll want to be informed on the options available to you and their respective benefits. Forming a corporation or LLC requires some paperwork and minor fees but in most cases the effort and cost is small compared to the benefits.

The LLC

Most small business owners opt to form a Limited Liability Company (LLC) because of the flexibility and simplicity that this option affords. LLCs can be structured in nearly any way seen fit by the members and changes can be made with relatively little hassle as the company grows or evolves.

Perhaps the biggest benefit of creating an LLC, as opposed to a sole proprietorship or general partnership, is that your personal assets will be protected. Your home, for example, could not be sought by creditors to pay outstanding business debts.

Although other types of corporations will also allow you to limit personal liability, one advantage of an LLC is that business tax liabilities are passed through to members and the business itself is not taxed. The tax benefits, coupled with the simplicity and flexibility, make an LLC a great option for any company that plans to keep ownership restricted to a relatively small number of individuals.

The C Corporation

A standard corporation (commonly referred to as a C Corporation) is helpful for businesses anticipating venture capital funding because it affords more flexibility when multiple investors are involved (and is particularly helpful if those investors won’t be actively involved in day-to-day decisions).

Although C Corps are subject to the “double tax,” this option allows more legal options that offset heavy taxation than an LLC or sole proprietorship. Both the salary and fringe benefits (health insurance premiums etc.) of a shareholder would be tax deductible, for example.

An additional benefit to C Corps is that they can offer stocks and stock options can be a big incentive for keeping and/or attracting employees. C Corps are a terrific choice for companies expecting the type of expansion that would require numerous investors.

The S Corporation

The S Corp’s most attractive feature is pass-through taxation. Similar to LLCs, S Corps are not subject to taxation on the corporate level and personal level. Unlike LLCs, however, S Corps offer many of the benefits mentioned in the C Corp section above.

The key difference between the S Corp and C Corp is that S Corps face more restrictions than C Corps when it comes to those benefits. S Corps are not allowed to have more than 100 shareholders, for example. S Corps also cannot have non-US citizen shareholders. These restrictions do not apply to C Corps. S Corps do have stocks (and the stock options that come with them) so they offer that advantage over LLCs but these stocks are restricted to a single class whereas C Corps are allowed more diversity in stocks.

The S Corp is a great choice for companies that anticipate growth outside of the local market but do not anticipate expanding internationally.

Call J. Cutler Law Today

At J. Cutler Law, we offer free initial consultations for you and your business. We can help you decide what type of entity best fits your business’s needs. Call us today for a free consultation at (801) 618-4469 or contact us online.

Is a corporation the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. In the last part of this series, we will discuss the pros and cons of the corporation.

Corporation

A corporation is a distinct legal entity, both for legal and tax purposes. It is deemed to have an existence separate and apart from its owners, the shareholders. A corporation has all of the powers and rights of a natural person, including the right to own property, to sue and be sued, and to enter into binding contracts.

Although owned by its shareholders, a corporation is controlled by the board of directors, which is elected by the shareholders. The shareholders' participation in the management of the corporation is essentially limited to electing the directors and voting on certain major corporate actions. However, shareholders may elect themselves to the board of directors and may still participate in management.

While the directors control and are permitted to manage the corporation, the board of directors generally appoints officers to manage the corporation's day-to-day operations. In smaller corporations, such as S corporations, the shareholders are often also the directors and officers.

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Pros

  • The corporation enjoys a separate legal existence with its own rights, privileges. and liabilities apart from the shareholders.
  • The shareholders' liability is limited to the amount they paid for their shares in the corporation.
  • Directors and officers are normally insulated from personal liability for the debts and obligations of the corporation.
  • Additional investment are generally easier to obtain, i.e., corporations may obtain investments from third party sources in exchange for the sale of stock.

Cons

  • Corporate formalities must be observed such as annual shareholder meetings and regular director meetings, among other formalities. 
  • Increased cost to form and operate a corporation, i.e., file articles, draft bylaws, shareholder agreements, file annual reports, etc.
  • Potentially decreased personal control of the business because of the separate roles of shareholders, directors, and officers.
  • The profits and losses of a C corporation are subject to double taxation: once at the corporate level when earned; and then at the shareholder level when distributed (does not apply to S corporations).

S Corporation

For legal purposes, an S corporation is no different than any other corporation. However, an S Corporation enjoys certain tax benefits. For instance, an S corporation is considered a pass-through entity, similar to partnerships. In this manner, the S corporation escapes the double taxation on dividend distributions of a C corporation, and the shareholders are allowed to offset losses sustained by the S corporation against their other income. 

Not all corporations may become S corporations.  The corporation must have no more than 100 shareholders, must have only one class of stock, and shareholders cannot be a corporation, LLC, or partnership, among other restrictions.

Summary

A corporation is a good choice for business owners that are seeking to minimize their personal liability, do not mind the increased formalities and operating costs of a corporation, and are seeking outside investors. While the double taxation of income of a C corporations is a downside, most new corporations can quality as an S corporation to avoid this. 

If you have any questions regarding your new business, or would like assistance forming your corporation, schedule a free consultation with J.Cutler Law.