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Should you consider forming a C corp to limit liabilities?

You have worked long enough for someone else and the time has come to start your own business. You have knowledge, experience, products people want and interested shareholders.

You are prepared to take risks, but you want to limit your liabilities. Will a C corporation provide the protections you want?

How the C corp operates

The C corporation is an independent entity that is owned by shareholders who elect a board of directors to oversee business decisions and corporate policies. Unlike an S corporation, where business profits pass through to shareholders with taxes based on personal returns, taxes on the profits of a C corporation are separate from shareholders. The owners are not personally liable for any debts the company incurs and they have protection from litigation for many issues such as those raised by mismanagement.

Other C corp benefits

A C corporation is usually not as likely to undergo a government audit as a sole proprietorship or even a limited liability corporation would be. Usually, the tax rate for a C corp is lower than it is for an individual. Further tax savings may be possible because the corporation and its owners split the profits between them. A C corp has the advantage of being able to write off the cost of company benefits, such as health plans. Such benefits are also tax-free for recipients. There is no limit to the number of stockholders who invest in a C corporation, which means that there is more opportunity to raise funds when needed. Foreign nationals can invest in a C corp, so there can be an influx of foreign money.

Potential liabilities

An attorney experienced with business planning will tell you that there are various reasons that you as the owner of a C corporation could have personal liability. For example, you might injure someone, or might be accused of being part of a fraudulent activity. You could be held liable for treating the C corp not as a separate entity but as part of your personal property. Your attorney can help you create a good business plan and documents that will help you limit potential liabilities. Now, you need to be prudent and exercise good judgment with your business, whatever business entity type you choose for it. That said, forming a C corporation can, in some instances, help entrepreneurs with their goals for their company.

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