C-corporations are one of the most common business structures in the United States. In Florida, many entrepreneurs opt to form c-corporations as they are separate legal entities set up under state law that offer optimal asset protection and limited liability.
In this article, you will find out the pros and cons of c-corporations in Florida.
Establishing a C-Corporation – Understanding the Concept
In the United States, c-corporations are considered the standard corporation under IRS rules. Under this type of legal structure, the owners of a company (shareholders) are taxed separately from the entity.
Any company can opt to be taxed as a c-corporation, including limited liability companies, partnerships, and sole proprietorships. Essentially, opting to be treated as a c-corporation means deciding how your company will be taxed.
C-Corporations are also exposed to corporate income taxation. Consequently, the taxation of the business’s profits occurs at corporate and personal levels, which leads to double taxation.
C-Corporation vs S-Corporation in Florida – What Is the Difference?
Even though c-corporations and S-corporations share some similarities, they are different when it comes to taxation.
In a c-corporation, owners pay taxes on the company’s income first and then pay taxes again on whatever income they receive as owners or employees. On the other hand, an s-corporation does not pay taxes, as owners are allowed to report the company revenue as personal income.
Establishing a C-Corporation in Florida – What Are the Pros?
C-corporations are separate legal entities, which means they are separated legal entities from their shareholders. Hence, it provides limited liability, meaning that owners cannot be liable for the company’s debt and losses.
In layman’s terms, the personal assets of owners and shareholders in a c-corporation are not at risk if the company goes bankrupt or fails.
Separation Between Management and Ownership
In c-corporations, there is a separation between management and ownership. Commonly, in this type of business structure, the board of directors is elected by the company owners/shareholders.
Being an elected/appointed member of a c-corporation’s board of directors, each corporate director is responsible for monitoring the company’s activities and creating strategies to protect the interests of shareholders.
Plus, c-corporations generally do not have restrictions on who can hold and transfer shares in the company.
Florida is one of the states with the largest foreign population in the United States, including a vast number of entrepreneurs.
In case a company is started on American soil entirely by foreign individuals or may be interested in foreign investors, they must opt to be taxed as a c-corporation.
Pass-through taxation requires ownership by US residents, which means a company with foreign owners/shareholders is not eligible.
Another great advantage of c-corporations is that they can pay for health insurance on behalf of their owners. Plus, there is no limit on deductions for the benefit, which means the owners of c-corporation in Florida can receive various benefits in a tax-free manner.
Establishing a C-Corporation in Florida – What Are the Cons?
Double taxation happens when a c-corporation pays taxes on its profits and then its shareholders have to pay personal taxes on profit shares received from the corporation.
However, owners/shareholders in c-corporations use several strategies to avoid (or at least mitigate) double taxation.
Firstly, many c-corporations retain earnings, meaning that they do not distribute profit shares to owners/shareholders. Hence, the company is only taxed once, at the corporate level. In many cases, c-corps also opt to pay their owners/shareholders with salaries instead of dividends.
Plus, there are no deductions of corporate losses for personal tax returns.
More Expensive than an LLC or Partnership
Typically, c-corporations are more expensive structures when you compare them with limited liability companies or partnerships. In this sense, c-corps are more expensive to establish, develop, and maintain than other business structures.
Increased Regulations and Formalities
In comparison with other entities, c-corporations are exposed to many stricter regulatory requirements.
There is virtually no flexibility in the way a c-corporation can be structured, with nearly fixed standards that must be met regardless of the situation. It is possible to point to the separation between ownership and management as one of the reasons behind this fact.
In a c-corp structure, the management is responsible for balancing the interests of the shareholders who elected them and the best interest of the company.
C-corporations are required to hold regular meetings between the Board of Directors and Shareholders, with detailed notes about every meeting to guarantee all parties remain accountable.