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C Corporation Series Part Three: C Corp Comparisons

Over the last few months, we have defined C Corporations and what entrepreneurs need to know about registering as a C Corporation. As our series on C Corps draws to a close, there are still a few odds and ends left to cover about this entity.

  • How does a C Corp compare and contrast to other entities like sole proprietorships, LLCs, and S Corporations?
  • What role does establishing a C Corp play in funding your business with Rollovers for Business Start-ups (ROBS) – also known as 401(k) Business Financing?

How Do C Corporations Compare and Contrast to Other Entities?

We have a thorough understanding of what it means to incorporate as a C Corporation. This is an entity that even provides the unique ability to use retirement funds for business.

The ability to sell stock aside, what else does a C Corp offer that sets the entity apart from legal structures like limited liability companies (LLCs), sole proprietorships, and S Corporations? Let’s take a closer look at how a C Corp stacks up against other business structures.

Comparison: C Corps and Sole Proprietorship

Sole proprietorships may be one of the most distinctive entity types thanks to its extremely minimalistic structure. Essentially, if an entrepreneur forms a sole proprietorship, they are fully the “boss” of the business. They can do business with the bare minimum in required filings, like business licenses. This type of structure tends to be an ideal fit for someone in an independent contractor role. It’s affordable and quick to file with little paperwork.

What separates a sole proprietorship from a C Corp — as well as virtually every other entity type — is there is no limitation for personal liability. Incorporating as a sole proprietor does not provide entrepreneurs with liability protection to keep their personal and professional assets separate. The sole proprietor is personally responsible for everything that impacts the business, good or bad. Taxation is also not separate under a sole proprietorship. The entity’s income and work expenses are considered to be personal expenses and are reported on the owner’s personal taxes. C Corporations, though they do not possess a total “I’m the boss!” ability, are much more structured as an entity.

Comparison: C Corps and LLCs

What does an LLC have in common with a C Corp? Both entities provide liability protection to separate an entrepreneur’s personal and professional assets. This ensures that an LLC’s members are not held personally responsible for the financial obligations of their business.

Want to learn more about what you need to know as a small business owner? Check out ourComplete Guide to Becoming a Small Business Owner.

An LLC, however, does have its fair share of key contrasts from a C Corporation. We made a handy bullet list to refer to below, to keep from confusing the two entities.

  • LLCs cannot issue stock. C Corporations may issue stock.
  • An LLC is a fairly flexible entity, while C Corps are more formally structured.
  • If you incorporate as an LLC, you may choose either an S Corp or a C Corp as your tax entity and save on taxes.
  • LLCs are not public structures. However, if an LLC decides to go public later on they switch to a public entity — like a C Corp!

Comparison: C Corps and S Corps

We saved the best, and most commonly confused entity type, for last! As a quick refresher, C Corporations are legal structures for businesses that tax profits separately from their owners. Earnings are taxed at a corporate level with dividends distributed to shareholders. These earnings are also taxed at a personal level; an act often referred to as “double taxation.”

S Corporations, on the other hand, are famously known for being a “pass-through” entity. An S Corporation technically begins as a C Corp or LLC, which makes the entity a C Corp with an S Corp tax election.

Still with us? Great! An S Corp then allows entrepreneurs to avoid double taxation because of its tax election. This tells the IRS not to tax the entity as a corporation, but rather as a partnership. When taxed as a partnership, income and losses pass through the business and are reported only on the owner’s personal tax return. This helps reduce the amount paid on taxes and lessen the risk of a potential audit, making S Corps a popular entity to incorporate a business.

Why Choose a C Corp Instead of an S Corp?

So, S Corps offer pass-through abilities while C Corps have double taxation. Why should you incorporate as a C Corp if another entity promises to lighten the tax load?

Do not let the concept of double taxation scare you away from incorporating as a C Corp! Double taxation may actually work towards your benefit, as C Corps can claim more tax deductions and benefit write-offs than most entities. Taxes aside, the structure of a C Corp also allows for big business. S Corporations have restrictions in place on who may be a shareholder in the company. C Corps do not, and their shareholders also receive liability protection. Under a C Corp, a business may raise investment capital and go public with an IPO.

Rollovers for Business Start-ups (ROBS)

What is ROBS?

Rollovers for Business Start-ups (ROBS) allow entrepreneurs to use their retirement funds to finance a business. Whether that means starting a company from scratch or investing in a franchise, ROBS allow businesses to be financed without incurring tax penalties or early withdrawal fees.

ROBS requires a C Corporation, so we wanted to cover why that is now that you have a better understanding of C Corps and other business entities.

How Does the ROBS Structure Work?

Great question! Let’s quickly break down those five steps below:

graphic visualizing the rollover for business start-ups process

  1. Establish a C Corporation. Why would your ROBS structure need to incorporate as a C Corporation? A C Corp is the only entity that allows stock ownership to be sold for cash. The ROBS arrangement is hinged on the sale of Qualified Employer Securities (QES), so the business must operate as a C Corp due to its ability to sell stock. Other legal entities, like LLCs and S Corporations, may not issue QES.
  2. Create a 401(k) plan. Once you have incorporated as a C Corp, the next step is to establish a retirement plan for the business. Typically, this is a 401(k) plan, but entrepreneurs are welcome to choose other types of retirement plans as well. After your retirement plan has been established, it’s advised that a custodian at a reputable financial investment management company is chosen to manage the plan’s investments.
  3. “Rollover” existing retirement funds into your chosen plan. Let’s say you decided to use a 401(k) as your company’s retirement plan. Now that it is established in the C Corp’s name, your retirement funds from your personal account may be “rolled over” into the C Corp’s new retirement plan.
  4. Your retirement plan buys stock in the C Corp. How is this step completed, exactly? The stock purchases are made through the QES transaction, which would not be possible without first having incorporated the business as a C Corp.
  5. Use the available funds to start a business. Now that the QES transaction is done, you’re officially ready to start a business or invest in buying a franchise. From leasing a storefront to buying equipment, the funds from ROBS may be used any way you like, or need, in your journey as a small business owner.

No matter what type of entity you choose to incorporate as, it is still key that you consult a legal professional. While I’d love to say “Yes, you should choose a C Corp!” – I cannot provide this kind of advice, especially since every situation is a little or a lot different. Since every business is different, yours may need additional professional guidance to discover which entity is its best fit.

Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

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