Why Do Startups Prefer C-Corps?

Selecting a corporate structure for your startup is one of the most difficult decisions a new business owner must make. Choosing a structure that does not meet your business goals can have long-lasting or unintended consequences.

A traditional corporation (“C-Corp”) is the preferred entity for startups because it allows you to raise capital better than a limited liability company (“LLC”), has fewer restrictions than a corporation electing “S” status (“S-Corp”), in addition to certain tax benefits, and personal liability protection.

The Law Office of Elliott J. Brown can set up your C-Corp for you and provide you with quality legal advice throughout the life cycle of your startup. 

Raising Capital

If your startup plans to raise equity capital, a C-Corp is the most attractive legal structure for investors and venture capitalists (“VCs”). Both usually want to be passive investors rather than involved in the day-to-day aspects of running your startup. 

C-Corps can issue preferred shares of stock (equity) which give investors additional rights above common stock. Some of these rights may include anti-dilution protection, the right to convert preferred shares into standard shares, and the right to participate in electing the startup’s board of directors.

S-Corps are limited to 100 shareholders and are prohibited from having non-individual or non-resident alien shareholders. This means that VCs are often prohibited from investing in S-Corps because they are not individuals. C-Corps do not have these restrictions, so they may attract more investors.

LLCs are not ideal for investors or VCs because they do not offer equity interests, but rather membership interests. While profit interests can be awarded, profit interest doesn’t offer the passive ownership and benefits of stock equity.

It should be noted that many VCs and investors prefer startups to be incorporated in Delaware. We outline the benefits of forming your startup in Delaware here.

Taxation

A C-Corp’s earnings are taxed at the corporate level, rather than at the personal level. The Tax Cuts and Jobs Act of 2017 reduced the top corporate tax rate from 35 percent to 21 percent. The tax rate for individuals decreased as well, so if the startup owner is only collecting a salary and not stock dividends, the double taxation burden for some may be less than that for a pass-through entity.

LLCs and S-Corps must align their fiscal year with the calendar year, but C-Corps have more flexibility. This allows startups to shift their income and losses to reduce their tax bill. C-Corps can write off their charitable donations as business expenses.

Investors can have up to $10 million in tax-free gains, and any losses do not pass through to the shareholders.

Personal Liability Protection

Structuring your startup as a C-Corp protects your personal assets from your business liabilities, as discussed in our previous blog post. Shareholders are not personally liable for business debts because the corporation is a separate legal entity. 

Protect Your Startup with a C-Corp

Choosing to establish your startup as a C-Corp gives your startup great opportunities for growth by attracting investors and VCs. The tax advantages keep more money in your business, and personal liability protection reduces the risk of losing your personal assets due to your business debts. With the right legal guidance, you can get all the advantages of structuring your business as a C-Corp.

Call the Law Office of Elliott J. Brown today at (732) 490-8200 or contact us online to learn how we can help your business today.