7 Reasons Why You Might Want to Structure Your Company as a C Corp

By Sarnaa Archie

First, what’s a C Corp?

A C Corp is one of your company’s many tax and legal structure options. Contrary to popular opinion, “C Corp” does not mean “Corporation.” (That would be redundant. A “corporation corporation”?) It stands for Subchapter C of the Internal Revenue Code—the massive collection of U.S. federal tax laws. It describes a type of organization that isn’t limited in how many shareholders or types it can have, or classes or types of stock it can issue, and it can, as if it were its own person (and it is legally speaking), hang on to its earnings.

Now that we’ve covered a basic description of a C corporation let’s look at some reasons you might want to (or have to) structure your company as a C corporation.

1. You Intend to Raise Venture Capital

Venture capital isn't just about money; it's about partnerships and potential. C corporations are the gold standard for VCs because they allow the company to issue different classes of shares, and the structure keeps the company’s legal and tax liability away from the VC firm and its investors. VCs like preferred shares, which have dividend and voting and liquidation rights preferred by investors structured like VCs. Structuring this way doesn’t automagically make you an attractive investment for a VC, but you aren’t even a possibility without it.

2. You Want to Sell Your Company Tax-Free (QSBS)

Imagine selling your business and not having to pay a dime on the profits from the sale. That's not fantasy; it's a reality under the QSBS (Qualified Small Business Stock) rule for C corporations. If you've owned your business for at least five years and it meets other criteria, the capital gains from selling your shares could be 100% tax-free. On a business sale of $5 million, that’s $5 million in your pocket, not the $3.9 million it would be after taxes.

3. You Want to Reinvest Profits More Efficiently

C corporations have a distinct advantage when it comes to reinvesting profits. Unlike other business structures—most of which are pass-through entities like S Corp, Sole Prop, and Partnerships, LLCs—C corps can retain and reinvest more of its profits than other business structures. In the other structures, the government takes slightly more from the pile. Remember, cash is king.  So, the ability to get a little more juice out of every dollar you create is like that last slight squeeze of the gas pump (or allowing your EV to charge fully) before a long road trip. Sure, the road in the business race is a little bumpy, filled with pot-holes, and rather unpaved; the victor isn’t always the one with the better tires or award-winning engine. The prize goes to the one who can stay on the track the longest.

4. You Want to Start an Employee Stock Ownership Plan (ESOP)

An ESOP can transform your workforce into committed partners in the business’s success. While ESOPs can be established by companies of many types, including S corps and LLCs. C corporations offer tax advantages that can be particularly beneficial, such as the ability to deduct contributions to the ESOP and defer taxes on stock sales. Though ESOPs are trusts and not corporations, you’d want to ensure that the stock you’re contributing to the employee plan has the right features. You get to design it. But this may require the creation of a different class of stock, one created specifically for the ESOP. No other structure allows for creating multiple classes of stock other than the C corporation.

5. You Want More Flexibility to Fund Your Growth

Whether you plan to grow organically through product or service improvements, some massive innovative nationwide marketing campaign, or through acquisitions or entering international markets, you’re more likely to accomplish these goals the more flexible the company can be in its fundraising. Partnerships, LLCs, and S corporations have severe limitations built into their structures, making them poor investment candidates. Think of them more as cisterns. They’re not broken. They’re just not designed to store cash value, which is what you’ll need for an equity raise. Though debt can be arranged on practically any entity with sufficient cash flow, assets, or both to cover the debt and interest, you can be more flexible with features that are more attractive to the various investor types—such as the use of hybrids like preferred stock and securities that convert like warrants and convertible debt and throw in options. With the proper structure, you can create a buffet of options that can please almost any investor type.

6. You Want to Attract and Retain Employees with Stock-Based Compensation

If cash is king in the business world, people are the queens. In this domain, they have almost equal power. The ability to employ your cash—real and paper—to recruit and retain the best people can be the difference between a great product and a poor one and excellent performance in the marketplace and mediocre. Besides, the labor pool competition, especially for talented people, is fierce. Offering stock options can be a game-changer in recruitment and retention strategies. C corporations are uniquely positioned to provide various forms of stock-based compensation, including incentive stock options (ISOs), which employees highly value. This helps attract top talent and retain them by aligning their rewards with the company’s success.

7. You Want to “Cash-Out” Some of Your Company’s Value

Starting and running a company involves years of hard work, personal sacrifices, sleepless nights or days, fights, resolutions, and fires big and small. (I know.) Then there is the financial risk. The opportunity cost we all take to venture out, without a net, floating on air as it is hoping we can assemble at least the engine, the body, and the wings—damn the seats—as we go along.

For many businesses, so much of the value created by the owners is locked into the business structure, and there’s no easy path to getting just a piece of the value out without selling the whole thing. Most structures, the pass-through ones like S corps and LLCs, as I mentioned earlier, don’t build up “cash value.” They’re designed to drain every last cent. (Mostly so the profits can be taxed at high personal income tax rates.) Re-structuring the company as a C corporation, or some aspect of it as one, to sell a piece to investors like private equity, hedge funds, or employees might be the best option. Plus, there are ways you can benefit from the qualified small business stock tax discount if the conversion is structured in a specific way. (See #2 above.)

Bottom Line

Becoming a C corporation isn’t just a technical decision; it’s a strategic move that can dramatically influence your business’s growth and potential. Starting as or converting to a C corporation can position your company in a way that maximizes your options today and secures your vision for tomorrow.

P.S. You should also know that C corporation profits are taxed, and any dividends or distributions to the shareholders after that are taxed at the shareholder’s tax rate. This is typically called double taxation. So there are some costs and benefits to weigh.

I can help you.

I’d love to help you navigate through these decisions. Contact me, and we can discuss how your company’s structure can be tailored to fit your business's unique trajectory.

Ultimately, the question isn’t just whether you’d prefer $5 million or $3.9 million (or a thousand times that) —it’s about making sure every decision brings you closer to your ultimate business goals. My team and I can help you explore options and make a decision that makes sense for you.