Thinking About Starting a Business? Here are the Benefits and Drawbacks on C Corporations

When figuring out how to structure your business, one option to consider is a C corporation. It’s not the right fit for everyone, but it has some benefits — and a few drawbacks — that could really impact how you run things and how your finances shape up. Let’s break it down.

Taxes: The Good and the Not-So-Great

One big thing about C corporations is that they’re totally separate from you when it comes to taxes. The corporation itself files and pays taxes — not you personally. Right now, the corporate tax rate is 21%, which is a lot lower than the top personal rate of 37%. So, there’s some savings there.

But here’s the catch: double taxation. The company pays taxes on its profits, and then if you take some of those profits out as dividends, you get taxed on that money again personally — which can be a pain. On the bright side, if you’re working for the company, you can pay yourself a reasonable salary — and that’s a deductible expense for the corporation. So, in many cases, that salary reduces the risk of double taxation quite a bit.

Also, keep in mind: all profits and losses belong to the company. If your business takes a loss in its first year, you (as the owner) can’t personally use that loss to offset other income. That said, if you're expecting to make money right away, this might not be a dealbreaker.

Liability Protection: Your Safety Net

Here’s a big plus — limited liability. If something goes wrong and the business gets sued or goes under, your personal assets (like your house or car) are usually off-limits. This is a main reason why many people choose a corporation setup.

Following the Rules

C corporations come with some paperwork and formalities. You’ll need to:

• File articles of incorporation

• Create bylaws

• Appoint a board of directors

• Hold organizational meetings

• Keep meeting minutes

  
  

It might sound like a lot, but it’s important. Following these steps helps make sure your business is treated as a separate legal entity — and keeps your personal liability protection in place.

Perks and Benefits

C corps also shine when it comes to fringe benefits. Things like health insurance, group life insurance, and retirement plans can be offered in a way that’s tax friendly. The company gets a tax deduction for those benefits, and in most cases, you don’t have to pay taxes on them personally (within certain limits, of course).

Raising Money Like a Pro

Looking to bring in investors? A C corporation gives you plenty of flexibility. You can issue different classes of stock with customized rights and perks — which is helpful when you’re trying to make deals with different kinds of investors. You can also raise money through loans, and the interest the company pays on those loans is deductible.

Flexibility for the Future

Not totally sure a C corporation is the right long-term move? No worries — you might be able to switch to an S corporation later if that ends up being a better fit. Just be aware that if your company sells assets within 10 years of making that switch, there could be some tax consequences.

That’s a quick look at the pros and cons of going with a C corporation. It’s a solid option for some businesses, especially if you’re looking for liability protection and room to grow. But like anything else, it’s not one-size-fits-all.

Got questions? We’re happy to help you figure out what kind of structure makes the most sense for your business goals.