Frequently Asked Questions

Advantages of a C-Corp

A C corporation (also known as a “C Corp”) is a tax type that applicable to either LLCs (if nominated) or Corporations (INCs). A C Corp can have an unlimited number of owners and multiple classes of stock. These characteristics and other advantages make it a good vehicle for attracting venture capital and other types of equity financing.

Unlike a LLC, a C Corp pays taxes at the corporate level. This means it is subject to the disadvantage of double taxation. As well, a C corp also must comply with many more federal and state requirements than an LLC.

Advantages

Ability to offer stock options
Limited liability for the owners
No restrictions on who can hold shares
Perpetual existence
Readily transferable shares – investors can transfer shares between themselves quite simply through sale contracts
Separate legal identity
Separation between ownership and management
Unlimited number of shareholders (LLCs are not well suited to multiple members)
Unlimited potential for growth through stock sales
Well-established legal precedents
Widespread acceptance by the venture capitalists and other investors

Potential to separate stock ownership and corporate management – You can have a corporation where the corporate shareholders do not have rights to manage the day-to-day management tasks of the corporation.

Disadvantages

A sole member LLC may be subject to no taxation at corporate level whereas a C Corp will definitely be subject to taxation on profits. The biggest disadvantage of using a C Corp, however, for most foreign investors is the “double-taxation” issue.

Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates, in the USA.

Depending on where the investor originates in the world, they may also have to pay personal income tax in their own country. Countries with double-taxation agreements with the USA may not be applicable in this scenario but there may be enhanced accounting requirements on the personal tax returns of those owners.