When Is a C Corp the Perfect Fit for Small Businesses? A Comprehensive Explanation

When Is a C Corp the Perfect Fit for Small Businesses? A Comprehensive Explanation

When Is a C Corp the Perfect Fit for Small Businesses? A Comprehensive Explanation

The type of business you register as impacts how much you can grow and how you pay self-employment taxes. Most small business owners choose an S corp business structure rather than becoming a C corp. But as these businesses start looking to grow and expand, they may consider switching to C corporation status to offer more flexibility.

This article explores what a C corp is, how to decide whether a C corp is the best legal entity for you, the pros and cons of becoming a C corp, and more.

What Is a C Corp?

A C corporation is a business entity that’s formed when you file articles of incorporation with your secretary of state or other appropriate agency. It offers limited liability to its owners because — unlike sole proprietors — a C corporation is a separate entity from the business owner. 

There are two types of corporations: C corp vs. S corp. A C corp is automatically chosen when you file articles of incorporation, but you can choose to operate with S corp status by filing IRS Form 2553. (However, not every small business qualifies to register as an S corp). Most businesses that go public are C corporations.

The main differences between C corps and S corps involved tax status and ownership:

  • C corp: The corporation pays corporate income tax, and shareholders (or owners) pay income tax on dividends. C corps allow an unlimited number of shareholders and allow any entity to become a shareholder, including businesses and foreign entities. It can have multiple classes of stock.
  • S corp: Doesn’t pay corporate tax and acts as a pass-through entity, meaning the business taxes pass through to the owners’ personal tax returns. There’s a maximum of 100 owners who must be U.S. citizens and individuals. It can only have one class of stock.

Although there are tax advantages with becoming an S corporation because you’ll avoid double taxation, there are times when it makes sense to register as a C corporation. When you’re looking to grow into a large public company, a C corporation might be your best bet. You’ll need to name a board of directors, officers, and draft bylaws when you’re registering your business as a C corporation. 

Advantages of Forming a C Corp

There are a few ways that it might benefit your business to create a C corp. First, you get limited liability protection. Becoming a C corporation offers personal liability protection that operating as a sole proprietor doesn’t. This means that if your business is sued, your personal assets won’t be on the line because the business is a separate legal entity. 

Also, you’ll get shareholder flexibility. You can have as many investors in your business as you want with a C corporation, which means it’s great for bringing on investors.

Disadvantages of Forming a C Corp

There also are disadvantages with creating a C corporation. First, you’ll experience double taxation on your business income — you’ll pay taxes once as a corporation and again with personal income tax. Limited liability companies (LLCs) and sole proprietorships have pass-through taxation. A pass-through entity means your business taxes pass through to your personal tax returns, but corporations also pay corporate tax. The current corporate tax rate is 21%

The other big disadvantage of a C corp is how complicated it is. Running a C corp requires a lot of work that other business entities don’t need, like holding shareholder meetings every year and putting out annual reports. Smaller businesses might think twice before registering as a C corp to avoid this complexity. However, there are times when a C corp small business structure might work well for you, which we dive into in the next section.

When Is a C Corp the Perfect Fit for Small Businesses?

There are times when a C corp is the best fit for a small business. Creating a corporate structure might make sense for your business, especially if the following is true. 

1. Need to raise significant capital

If you plan to bring a lot of money into your business through investment, a C corporation makes the most sense because you can have an unlimited number of shareholders, and the investors can be businesses rather than individuals. You won’t be held back by the investor limitations of an S corporation. 

2. Plan to go public

If you want to make money for your business by selling shares of stock, a C corp makes sense. Unlike an S corp, you can have more than one class of stock with a C corporation. This includes common and preferred stock, which allows you to offer different voting rights to specific shareholders. 

3. Want to protect personal assets

The C corp tax structure separates your personal and business assets. This means that if your business faces legal trouble, your personal assets are protected since they are considered separate from your business. If you want that level of protection, creating a C corp may make sense.

4. Need long-term stability

Although it’s usually not a problem to switch from an LLC to a C corporation, for example, starting off with a corporate tax structure may simplify running your business in the long term. If you already know you plan to go public, you may want to become a C corporation from the beginning. Also, if you plan to sell your business in the future, it’s easy to transfer ownership by selling shares with a C corporation. 

5. Want to attract investors

Startups and entrepreneurs often write investors into their business plan. Most investors prefer investing in a C corporation because they can secure preferred stock in that business. They also understand that C corps have more flexibility in terms of raising capital through stocks, so being a C corporation is often more attractive to investors.


Opening a C corporation may be the right move for your business if you plan to grow your business drastically. The negative tax implications may be overridden by the advantages of being able to bring on an unlimited number of investors to raise money. A C corp offers flexibility for growth that you probably won’t be able to access with another type of business, so if you’re looking to increase the size of your business, it may be your best option. On the other hand, the increased complexity of running a C corp may not make it worth your time and energy.

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