Creating a new business can be difficult for some because of all the risks that come along with it. New businesses usually generate losses in its first year of operations, and this is what discourages hopefuls. Fortunately, there are ways on how people could provide their businesses with some sort of legal protection. One of such ways is through the process of incorporation.

What are C Corporations?

A C corporation is the most basic type of corporation. It has the capability of standing as an individual entity – one that is separate and distinct from its shareholders. It can both sue and be sued in its own name. It is also being taxed as a separate entity, with such taxation following a special corporate tax rate, and not those rates applicable when taxing individual people.

The Pros and Cons of C Corporations

Before deciding on creating a new business under this category, you must first be enlightened on the different advantages and disadvantages of having a C corporation business.

The Pros

Among other things, there are two reasons why forming a C corporation is so enticing to business people.

1. In a C corporation, the shareholders’ assets are protected.

C corporations enable the shareholders to have limited liabilities in relation to the debts of the business. When things go wrong and the company starts generating only losses, the unpaid creditors could only go after the assets of the corporation – the entity actually owing them money. Once all the assets of the company are exhausted, the creditors can no longer sue the shareholders of the company. This then makes all their personal assets protected.

2. The capital of C corporations can easily be raised.

C corporations usually are composed of more than 100 shareholders. With this large number of investors, raising capital for the business poses no problem at all.

Also, C corporations can openly sell their stocks publicly in the stock market. The public can freely buy stocks from these corporations, and the payment for these stocks will be added to the capital of the entire corporation.

The Cons

Creating a new business under a C corporation category sure does have its perks, but this has disadvantages, too.

1. Double taxation exists in this kind of arrangement.

In a C corporation type of business entity, double taxation exists. First, the revenues of the C corporation are being taxed using a special corporate tax rate. After the deduction of this said tax, the unappropriated income of the company is then distributed to its shareholders in the form of dividends. These dividends, when received by the shareholders, will again be taxed by the government using the tax rate applicable to individual taxpayers. This constitutes double taxation – a principle usually avoided by business people all over the world.

2. The tax returns filed by C corporations tend to be complicated.

Due to the complexity of the structure of the business, filing tax returns for the entire business entity tends to be a little more complicated. Because of this, accountants and bookkeepers are being hired every once in a while to do all the work.