• Top Reasons to Choose a C Corporation
  • June 11, 2009 | Author: Joseph M. Wallin
  • Law Firm: Davis Wright Tremaine LLP - Seattle Office
  • There are many good reasons, in making your choice of entity selection for a startup technology company with multiple owners that desires to follow the traditional startup company route of investment in technology, hiring and growth to ultimate sale or IPO, to choose a C corporation rather than an S corporation or an LLC.  My top reasons for choosing a C corporation are as follows:

    • It is easier to form a C corporation than an S corporation or an LLC.
    • You can issue qualified small business stock and potentially qualify for the qualified small business stock benefit under Section 1202 of the Internal Revenue Code and the rollover benefit under Section 1045 of the Internal Revenue Code (by the way, Obama has proposed that long-term capital gains on QSB stock held for 5 years go to Zero).
    • You avoid having to issue your owners Forms K-1, subjecting them to federal income tax on the entity's income (regardless of whether that income is distributed to them), and potentially subjecting them to state income taxes in the various states in which the entity has income tax nexus.
    • You avoid having to agree to a cash distribution scheme to cover the taxes of the owners on the entity's income taxed to them.
    • It is easier for a C corporation to engage in an equity or debt financing.
    • Venture capitalists typically won't invest in LLCs and can't invest in S corporations.
    • Only C corporations can go public (generally).
    • Equity compensation in a C corporation is easier.
    • C corporations can participate in tax-free reorganizations under the Internal Revenue Code.  LLCs taxed as partnerships cannot.
    • There are potential self employment tax savings over what would be possible with an LLC.
    • There is no limit on the type or number of shareholders that you can have.
    • The dreaded "double tax" that everyone is afraid of with C corporations rarely ever occurs (there are, of course, exceptions--the cash cow business being one).  Most positive exits are 1 layer of tax events--either stock sales or mergers structured so that there is only 1 layer of tax--at the shareholder level.
    • Although losses cannot be deducted by the shareholders of a C corporation, losses frequently cannot be deducted by non-active members of the company in any event--so the loss pass through benefit to passive investors is frequently in fact not very helpful.
    • The tax accounting complexities associated with maintaining capital accounts in accordance with the Treasury Regulations make LLCs expensive for companies that desire to raise multiple rounds of financing.