If you're planning to start a business, you may be wondering if you should be a sole proprietor or form a corporation. What is a C Corporation, though, and will it work to your benefit?
When a small business decides to incorporate, it automatically will become a C Corporation. This is also known as a regular corporation.
The benefit of a corporation is that it's seen as an individual entity, which means it's separate from the owners. The owners become shareholders of the corporation, owning a piece of the corporation. For instance, if there are two owners, each may have a 50 percent share in the company.
There are a few benefits to being a corporation. For instance, if you are sued because a product was defective, you'll only be liable as far as your company's investments go. Your personal wealth or assets would not be subject to the lawsuit. If you were in a partnership or sole proprietorship, this would not be the case, and you could be personally sued for that defective item.
Your corporation also pays its own taxes to the Internal Revenue Service. One downside of this is that you will essentially be taxed twice. The first time is when your corporation's income is taxed, and the second time is when your share's income is taxed.
Incorporating is ideal if you want to limit your liability in the company and prevent yourself from risking your own assets. You'll know that your personal assets are always protected, even if something goes wrong with your company; that means your retirement, savings, and other items won't ever be at risk because of being sued or going bankrupt.
Source: Inc., "C Corporation: A Definition," accessed April 05, 2016