For some reason, many entrepreneurs decide early on that they want to form either an LLC or an S-corp. And for many new businesses, one of these two options may make the most sense: they are both taxed as pass-through entities, which is simpler than a corporation’s tax structure, and often works out to be more favorable. Additionally, an LLC is usually easier to set up and manage than a corporation; this can be attractive to time- and money-strapped young startups.
But don’t overlook the tried-and-true C-corporation. This is the “standard” corporation; every corporation is a C-corp unless and until it elects to be taxed under Subchapter S of the Internal Revenue Code. Depending on what you want to do with your business, a C-corp may be a strong choice.
One of the advantages of a C-corp is that it can issue multiple classes of stock. An S-corporation can’t do this, which typically means that founders forego the authorization of preferred stock. If your company is planning to take on investors, this could present a big problem: many sophisticated and professional investors want to get preferred stock in exchange for their investment, and some may even refuse to invest in an LLC or an S-corporation. Additionally, it’s typically easier to transfer stock in a C-corp than in an S-corp or LLC.
C-corps also give you the option of certain fringe benefits that you can’t take advantage of with an LLC or S-corp. Some insurance premiums paid by the company may be deducted by its shareholders. C-corps also pay a lower tax rate on qualified small business stock.
What are the downsides of the C-corp? There are several, but the factors that most often dissuade entrepreneurs from this structure are its complexity and the potential for double taxation. A C-corporation is more complex to set up and manage than an LLC, given that a board has to be appointed, stock has to be issued, and written records must be kept of the company’s decisions. Additionally, because a corporation is itself subject to tax, and its shareholders must pay taxes on dividends, many small businesses shy away from the C-corp structure due to the possibility that some of their income will be taxed twice. However, the fear of double taxation is often overblown and can be greatly reduced with careful tax planning.
A note on the Delaware C-corp: many entrepreneurs choose to incorporate a C-corp in Delaware due to its favorable tax structure. As a result, many companies have made Delaware their corporate home, which in turn has produced a deep body of case law and even spurred Delaware to maintain a court dedicated to corporate disputes. This makes Delaware attractive for a number of reasons, and it’s typically worth at least exploring a Delaware C-corp. Many investors insist on a Delaware C-corp for these reasons.