Progress is driven by entrepreneurs like you. Every day, you take risks, moving quickly, adjusting to an ever-changing commercial environment. With one slip-up, legally, your progress can be halted. That is why it is important to start your business from a strong position.
As we discussed in the previous post, A Guide to Choose The Right Business Entity , the first step to setting up a business is deciding what entity type to set up. There are three major entity types that businesses can choose from: an LLC, a C-Corp, or an S-Corp. Each type has its own set of advantages and disadvantages. In this article, we will focus on C-Corps and their strengths and weaknesses to help you make an informed decision for your business. Seeking the guidance of an experienced business lawyer can help ensure that you select the corporate structure that best reflects the goals and needs of your business.
The purpose of a C-Corp is to protect each individual owner’s assets from seizure if the corporation gets sued. C-Corps were created to replace traditional partnerships where each business partner was liable for the debt and mistakes of the business. This meant that if the business is sued, each individual partner’s personal assets, such as their home, could be seized to pay the debt. Instead, a C-Corp protects each individual partner’s personal assets allowing them to engage in business deals, they may not have otherwise if their personal assets were on the line.
There is only one taxation option for the C-Corp, meaning that this entity is less flexible than an LLC in that regard.
When examining the benefits of creating a C-Corp, it is important to consult with a qualified business attorney who can help you examine the goals and purpose of your business to give you advice and determine which entity type best fits your needs.
In order to qualify for QSBS, a business must meet the following general criteria:
Under 26 USCS § 1202, the IRS defines a qualifying trade or business as “any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees” or is otherwise engaged in the business of finance, investment, banking or another similar business. An experienced business attorney will be able to help you determine if and how your business qualifies if you wish to take advantage of this option.
It is important to discuss both the goals and purpose of your business with your business attorney as well as your exit strategy to determine whether using the Qualified Small Business Stock option makes sense for you.
As with each of the three major types of corporate structures, C-Corps have their downsides that go along with the benefits.
The businesses that tend to benefit most from using the C-Corp structure are those businesses seeking to eventually offer an Initial Public Offering (or IPO). In an IPO, a privately held company begins to sell stock to the public on public-traded stock exchanges. The benefit of an IPO is that a company begins to be publicly traded and they can use that as their main source of raising capital. Given the flexibility with the different types of stock a C-Corp can offer, this makes it an ideal corporate structure for those businesses seeking to be publicly traded.
Another ideal candidate for the C-Corp structure is a high-growth startup looking to obtain backing from investment firms or venture capitalists. Investment firms tend to look favorably on businesses formed as C-Corps because the investment packages tend to be simpler and the growth and equity for investors are also easier to understand. It also has tax benefits for charitable or foreign investors. For many investors, the Qualified Small Business is also an attractive option because it allows the investor to save on capital gains taxes provided that they are willing to hold onto the stock for five years.
In the end, it is very important for you to choose the business entity that is right for you. Keep in mind how it will affect your business, finances, and legal exposure. And while you choose your business entity, whether a C-Corp or another type, make sure that your CPA and your business lawyer agree with your choice.
As entrepreneur lawyers, we appreciate your path as a business owner. We love working with bold visionaries like you that navigate your industry with purpose. That is why we are here, to help you navigate hidden legal risks so that you can focus on your business.
For any queries and doubts that you have, talk to your business lawyer and tax attorney. In fact, we offer these services and can help you. So, if you need help with choosing your business’s type and starting your business, Freeman Lovell can help you. Feel free to reach out to me at josh@freemanlovell.com or click on the button at the upper right corner of the website to contact us to learn more!
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