“C-Corporation” or “C-Corp” is a type of legal entity that many businesses use to structure their Equity Ownership and operations. A C-Corporation is commonly used for technology-focused Startups because it typically is better suited for raising capital. A C-Corporation can have multiple Stockholders (both foreign and domestic) across different classes of Stock with varying rights, preferences, and privileges.
A C-Corporation provides other benefits, including:
• Limited Liability Protection for Stockholders by not holding them liable for the Corporation’s Debts;
• Potential qualification of its Stock for a significant tax benefit as Qualified Small Business Stock;
• Status as the go-to legal structure (especially if a Delaware C-Corp) to raise money from Venture Capitalists and other Institutional Investors; and
• Tax-advantaged methods to grant Stock Options and other Equity Incentives to Employees, consultants, and advisors.
One issue with a C-corporation is Double Taxation. First, the C-Corporation’s profits are taxed at the corporate income tax level. Then, any Dividends distributed to Stockholders are taxed at their respective income tax levels. For many Startups, Double Taxation is not a significant issue because the Stockholders do not receive Dividends as they grow and reinvest profits or seek additional funding.
An S-Corporation does not have Double Taxation, but it cannot raise capital from a variety of Stockholders across multiple classes of Stock. In particular, an S-Corporation may issue only one class of Stock (e.g., Common Stock). Also, an S-Corporation cannot have more than 100 Stockholders, and they all must be individuals and U.S. citizens (with a few limited exceptions).