If your business has grown sufficiently large in sales, customer base, and market share (at least in your local area) and you are ready to expand your business in new directions, forming a C Corporation may be a wise move.
A C Corporation is often the logical next step for a burgeoning enterprise, but on the other hand, you should be sure you weigh the benefits and drawbacks before you move on from, say, an LLC to a “true corporation.”
What are the best reasons to form a C Corporation? How do you know it’s time? Here are 5 key answers to that question to help entrepreneurs on the verge of a business structure reorganization see things clearly:
1. Separation of Personal & Business Taxes
Although being a corporation subjects your business to corporate taxes, it also means your personal income and assets are not taxed in the same category as corporate profits and assets.
It’s true that employees (including the owner as self-employed), as to salaries and shareholders as to dividends, are taxed in addition to the business being taxed (a kind of “double taxation”), but it protects your personal income. Plus, you are allowed to reinvest money into the company at a lower corporate tax rate.
2. Tax Savings Through Deductions
It’s not true that forming a C Corporation will necessarily mean paying more taxes overall. As far as business taxes are concerned, your bill might be lower than before. Here’s why: you can potentially get so many tax deductions and tax breaks that your taxable corporate income is relatively low.
You can deduct the salary of your employees, rent of corporate property, maintenance and depreciation of your building/equipment, employee benefit plans and pensions, charitable donations, and more. If you have “enough going on” and manage things wisely, you can drastically shrink how much your business must pay the IRS each year.
3. Limiting Your Personal Liability
Another advantage of a C Corporation – one also shared by a limited liability company (LLC), is that of separating personal from business liabilities. This comes into play in two main ways: business debt and lawsuits.
Should your corporation (allegedly) commit some act of negligence or provoke other grounds for a tort action, only the corporation can be sued – not the owners or shareholders personally. And, you will not be liable personally for business debts and losses.
The only real risk that remains is the possible loss of investments you’ve put back into your own business. But you can at least control how much you put in and how it’s spent.
4. Ability to Issue Corporate Stocks
Only by becoming a corporation do you gain the legal right to create stocks for your company and sell them to shareholders. Additionally, you can provide stock options for your own employees.
By creating stocks and marketing your business, it is possible to vastly expand the amount of capital you have on hand to work with. In effect, you are opening the door to outside investment that could flood in and skyrocket your corporation’s growth.
5. Giving the Business a “Life of Its Own”
Once you form a corporation, the board will guide the business into the future after the owner passes away or sells out and moves on. This means that your business has a “life of its own,” independent of its owners and can last for generations to come.
Creation of a C Corporation greatly increases the chances of the products and services you’ve worked so hard to provide the general public will not suddenly end. If you want to create a legacy, a corporation helps you do that.
These are five of the top reasons why business people opt to advance to a C Corporation instead of staying an LLC or a sole proprietorship. Although there are a few disadvantages, given the right situation, the advantages far outweigh them.