Choosing a legal structure that fits your vision is a key decision for any new business.
In this short article, we’ll explore if a C Corporation is the best structure to get you started.
It’s very possible you’ve heard “just use a C Corp” in recent years. This advice has become common with angel investors, accelerators, and mentors from the global startup community for some time now.
But is it good advice?
Here we’ll explore if a C Corporation is the right fit for you.
Generally speaking, a good rule of thumb to consider a C Corp as the right vehicle for your journey is to ask yourself:
Will I be issuing shares in the future to raise money, incentivize future employees or sell part of my business when it reaches a certain scale?
If the answer is “that’s something I’d consider," a C Corporation might be the right structure for you.
Let’s explore other important things you should know when considering a C Corp beyond this rule of thumb.
Why create a C Corporation?
If you’ve read our article on LLCs, you’re probably wondering what the main differences between an LLC and a C Corp are. Here are a few differences.
- The need to raise venture capital or issue stock to employees is the most frequent reason why many entrepreneurs choose this structure. C Corps are ideal for businesses seeking to raise money from angel investors or VC firms. The ownership of the company is expressed in shares of stock, and you can use these shares to raise capital and issue employee options.
- C Corporations also allow founders to easily allocate shares throughout the life of your company. For example, adding a new partner with 5% equity in your company or giving an employee .05% ownership as part of their compensation is easier to do with a C Corporation.
When deciding between an LLC and a C Corporation, consider how you intend to structure the leadership of your business, your fundraising and hiring goals, your growth strategy, and overall goals.
If equity compensation is key for your business success you’ll probably want to consider a C Corporation.
Remember, Firstbase.io’s all-in-one platform gives founders access to free tax and legal consultations that will help set you on the right course and avoid costly mistakes.
Here are some additional advantages of a C Corporation.
3. C Corporations offer limited liability for their founders.
4. There are many specialized service providers that cater to this entity structure.
5. C Corporations generally pay corporate taxes on their own profits, and their shareholders pay personal income on the capital distributed to them.
6. C Corps offer flexibility to handle many other unique situations and scenarios.
Can non-US founders create a C Corp?
- A C Corp can have an unlimited amount of shareholders, from anywhere in the world.
- A C Corp’s officers, directors, and investors can reside anywhere in the world.
- C Corps are the most widely recognized business entity in the world.
- C Corp owners are protected from personal liability for company debts and obligations.
What are the advantages of a Delaware corporation?
Delaware is the most common state for C Corps, more than 60% of Fortune 500 companies are registered as C Corps in Delaware.
Delaware is known for being a business friendly state, their laws are flexible for founders and shareholders. There’s a body of law in DE where many court cases have already been tried, so businesses have more certainty about how different legal disputes will turn out. Venture capital firms and angel investors typically require companies to be structured as a Delaware corporation as a condition of funding the company.
Tax benefits play a big role in this (Delaware doesn’t have any state tax for Delaware C Corps located outside of Delaware), but for many entrepreneurs reducing the risk of dealing with less-known state rules is the main reason why they choose Delaware.
If you are a tech startup looking to raise money from investors, a Delaware C Corp is an excellent choice.
What are the advantages of a Wyoming corporation?
Entrepreneurs often choose WY because tariffs, franchise fees, and services are usually less expensive than those in Delaware which helps control costs for early stage companies.
C Corporations in WY favor smaller, privately controlled companies since there are no franchise fees. Compare that to Delaware C Corps where the yearly fee is several hundred dollars. For more specific details about costs and fees in Wyoming, check out Firstbase.io’s Founders Guide to Incorporating a US Startup.
If you are an entrepreneur in an early stage company with a limited budget and no near-future plans of raising capital, a C Corp in Wyoming is a great choice for helping to reduce costs.
Tax codes in the US can be overwhelming but as a future owner of a C corporation keep this in mind:
If you’re a US resident, setting up a C Corp can help you minimize your taxes. Corporate tax rates in the US are only 21%, and taxes only need to be paid on the money distributed to you.
If a Corporation is owned by foreigners and the company doesn’t have any “US-connected income,” it has no tax liabilities in the US. Foreign C Corp shareholders are usually not required to pay the personal income taxes in the US on the distribution from the company, if they don’t meet the “substantial presence test.”
The term “US-connected income” generally means income generated in the US, and applies to businesses that have a physical presence of the business in the United States and operate in the US through a “permanent establishment” or have “dependent agents” (e.g. full-time employees) that do something essential to grow your business in the US.
On the other side, the US uses the Substantial Presence Test as a way for international residents to assess whether they qualify for certain tax requirements based on the physical duration of stay within the US.
You can read both guidelines provided by the IRS (www.irs.gov) for these 2 cases in our "Founders Guide to Incorporating a US Startup."
Firstbase.io is not an accredited legal company and since the body of law is rich enough to have different cases and opportunities, we always encourage you to consult with an attorney to determine the best structure for your business.
Remember that Firstbase.io services include free tax and legal consultations. Our legal partner will be able to evaluate your needs and provide specific advice based on your unique business structure.
There are a few more costs that you should be aware of before incorporating.
Delaware C Corps are required to pay an annual franchise fee of $175 and up, depending on the company’s structure and assets. Additionally, after the free first year, you might want to renew the registered agent that is provided by Firstbase.io ($50/year), or purchase a service from another agent.
Wyoming C Corps aren’t required to pay franchise fee, but you will have to pay a $50 annual report fee once a year. The WY-based registered agent we work with is also $50/year, and the first year is included for free.
Once you’re set up, working together with your registered agent is the best way to determine your compliance.
As we mentioned earlier, there are many benefits that most early-stage companies can use to be more efficient and save money. Again, for more specific details about costs, franchise fees and other benefits for startups, check out Firstbase.io’s Founders Guide to Incorporating a US Startup.
Firstbase.io is dedicated to helping founders from all over the world easily launch a US-based business. From anywhere, in a few days. Firstbase.io’s powerful platform enables entrepreneurs a convenient way to grow and access to the most powerful startup ecosystem in the world. You can easily launch your corporation by visiting Firstbase.io and clicking “Get Started.”
P.S. This is not legal advice. Please seek your own legal advice based on your own personal situation. If you don’t have your own attorney, Firstbase.io offers free tax and legal consultations as part of our all-in-one service.