Business Incorporation as a C Corporation

There are very limited circumstances where a C corporation would be advised for a small business incorporation. The enactment of the more flexible limited liability company (the “LLC”) has made C corporations not very business or tax friendly. The major reason is the double taxation that C corporations are subject to (as oppose to pass-through taxation for most limited liability companies). Specifically, C corporations are taxed at both the corporate level and the shareholder level, which significantly reduces the amount of money a business owner takes home at the end of the year. On the other hand, there are a few limited situations where a C corporation would be advisable.

Business Incorporation – C Corporation

First, if the business is intending on making a public offering of its stock early into its business life cycle it likely should incorporate as a C corporation. Only C corporations are allowed to offer their stock as public securities on the public markets. However, if a public offering is not imminent, it may make legal and financial sense (in some cases) for the business to incorporate as a limited liability company and then convert its status to a C corporation when it is ready to make a public offering.

Second, if the investors of a business require the business to be formed as a C corporation, then the hands of the business owner may be tied (unless they can find capital from other sources). Also, where crowdfunding is one of the sources of investment funds, a C corporation may be a better entity to use than a limited liability company since it is in a better position to take advantage of the opportunity to raise equity through crowdfunding (due to Securities Exchange Commission (“SEC”) rules).

Third, a C corporation would be preferable to an S corporation where there are foreign investors. Foreign investors (non-resident aliens) cannot legally hold title to S corporation stock. They can, however, hold title to C corporation stock. In such case, a C corporation would be necessary.

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