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Choosing a C-corporation structure to attract investors

On Behalf of | Jun 22, 2023 | Business Formation, Business Law |

For entrepreneurs starting businesses in New York, one of the initial steps they will need to complete is deciding what form it will take. Choosing a legal entity structure for a business involves determining the type of liability protection the entrepreneur needs and how the business will be taxed. However, it’s important to consider investors when figuring out how to structure a business. Entrepreneurs who want to attract investors for start-up capital or other purposes might want to structure their businesses as C-corporations.

What is a C-corporation?

C-corporations are legal entity structures in which the shareholders of a business are taxed separately. Companies structured in this way pay corporate income tax and must have a board of directors that meets regularly. The shareholders hold ownership interests in terms of shares in the corporation. When a business is structured as a c-corporation during the business formation process, the business’s assets and income will be separate from those of the shareholders, so the shareholders will typically not be liable if the corporation is sued. Instead, the most they might stand to lose is what they have invested in the company.

Why investors prefer C-corporations

There are multiple reasons why investors prefer C-corporations when they are deciding where to put their money, including the following:

  • Corporate earnings are taxed separately instead of being passed through to the shareholders
  • Investors can receive preferred stock when investing in C-corporations
  • Shares in a C-corporation can be freely transferred
  • Ownership of a C-corporation is distributed among shareholders
  • Offering stock options allows C-corporations to attract key talent
  • C-corporations are the oldest and most established business entity structure

While forming a C-corporation is more complicated than forming a limited liability company or S-corporation, this structure offers strong liability protection to shareholders and multiple features that are attractive to investors. Entrepreneurs who hope to attract angel investors might want to consider structuring their companies as C-corporations.

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