Incorporation Evaluation: C Corporation Advantages & Disadvantages
When you start a business, you have to decide whether you will operate as a sole proprietor or form a corporation. C corporation advantages include lower audit risk, limited liability for business debts, and the ability to raise capital by selling shares of company stock. You also have the option of forming an S corporation, which has different advantages and disadvantages than a C corporation. Understanding C corporation advantages and disadvantages will help you determine if this business structure is right for you.
Advantages of a C Corporation
One of the biggest C corporation advantages is that the owner has limited liability for the debts of the business. If a sole proprietor orders $10,000 of merchandise from a vendor and fails to earn enough money to pay for the order, the sole proprietor is personally liable for the $10,000 debt. This means he must use his own money to pay the vendor. If the business owner does not have enough funds to do so, the vendor may file a lawsuit, putting the owner's home and personal property in jeopardy. C corporation owners, on the other hand, have limited personal liability. This means they do not have to give up their personal property to satisfy business debts, even if a business fails. An S corporation also offers limited liability, which is why some business owners choose to form corporations rather than operate as sole proprietorships.
Business owners should also be aware of C corporation tax advantages. A business owner may be able to use her C corporation status to reduce the amount of income tax she pays each year. If she earned $100,000 as a sole proprietor, that entire amount would be subject to personal income tax and self-employment tax. If she earned $100,000 as the owner of a C corporation, however, she could choose to take a $40,000 salary and leave $60,000 in the corporation. In that case, the business owner would only pay personal income tax on the $40,000 salary and corporate tax on the remaining $60,000. Another C corporation tax advantage is the ability to lease assets to your own company. If you do this, you will qualify for tax deductions that can reduce your total tax obligation.
Apply for C Corporation Status Online
After you review all of the C corporation advantages and disadvantages, it is important to talk to an attorney or tax adviser before proceeding. You must choose a business structure based on your own circumstances, so what is right for another business owner may not be right for you. What someone else considers a C corporation advantage may actually be a disadvantage for your business. If your advisor recommends forming a C corporation, you can take advantage of online filing. All you need is a computer with an Internet connection to complete the process.
C Corporation Pitfalls
Although there are a number of C corporation advantages for business owners, there are also some potential pitfalls. If you own a C corporation, you cannot pass losses on to your company's shareholders. You are also subject to double taxation if you distribute dividends to your shareholders. This means that you pay tax on the business profits and then your shareholders pay income tax on the dividends. Your attorney will be able to tell you if these drawbacks outweigh C corporation advantages. The price to form a C corporation varies from state to state, with fees ranging from a low of $45 in Arkansas to a high of $440 in Connecticut. If you use an online filing service, you should also expect to pay at least $99 for that service.
Choosing a business structure is one of the most important decisions you will make because your choice affects your legal status and your tax situation. Review C corporation advantages and disadvantages then talk with your attorney to determine if this structure is right for your business. If you need more information, invest in books about business planning and taxation.