Early stage companies find the C-Corp structure appealing because:
- C-Corps limit the liability of investors and firm owners. The most an investor can lose if the business were to fail is what they have invested into the business.
- C-Corps can issue different types of equity instruments such as convertible stock or preferred stock, which institutional investors generally prefer over common equity.
- C-Corps can issue stock options and “incentive stock options” to motivate and compensate their employees.
- The potential tax savings on capital gains through QSBS may outweigh the “double taxation” issue, especially if the Company has no or limited taxable earnings.
Of course, if presented with two similar investment opportunities, investors may prefer the C-Corp as their gains may be excluded from taxes if they qualify as QSBS.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.