Choosing the right legal structure is a critical decision for any startup. One of the most common, especially for companies seeking investment, is the C Corporation. But what are the real advantages and disadvantages of this entity type?
In this detailed video, Phil Crowley, founder of Crowley Law LLC and a seasoned corporate lawyer specializing in startups, breaks down the key considerations for forming a C Corporation.
Phil explains that a C Corporation is treated as a separate taxable entity at both federal and state levels. This leads to one of the most talked-about aspects: double taxation. The corporation pays tax on its profits, and then stockholders pay taxes again on any dividends received.
However, Phil highlights that despite this, there are compelling advantages to the C Corporation status, particularly for growing businesses:
Investor Preference: Venture capitalists and other institutional
investors often prefer, or even require, a C Corporation structure,
especially those organized in Delaware.
Significant Tax Advantages for Stockholders: Learn about the
powerful benefits associated with Qualified Small Business Stock
(QSBS). Under specific Internal Revenue Code provisions,
stockholders who purchase shares directly from a qualifying C
Corporation and hold them for at least five years may be eligible
to exclude up to $10 million (or more) in capital gains from
federal tax when the company is sold. This is a major
incentive!
Liability Protection: A core reason for forming a corporation is to
create a shield, protecting the personal assets of the owners from
business debts and liabilities.
Early Stage Realities: Phil notes that for new corporations not yet
generating significant income, the concern of double taxation might
be less immediate compared to the benefits of liability protection
and attractiveness to investors.
This video will help you understand whether a C Corporation is the
right fit for your venture, weighing the tax implications against
the strategic advantages for funding and growth.
If you're an entrepreneur, founder, or innovator, especially in the tech or life sciences sectors, understanding these corporate structures is essential for making informed decisions that can impact your company's future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
