Explore the core features of C corporations—from taxation and liability to growth potential—and get a step‑by‑step look at how to set one up.
- A C corporation is a business structure that separates the business entity from the owners and shareholders for taxation and liability.
- The C corp’s profits are taxed as corporate income tax, and the shareholders pay personal income tax on dividends received from the corporation. This is commonly referred to as double taxation.
- This business structure is often chosen when there are plans to explore venture capital funding or take the company public.
When starting a business, the structure you choose can affect everything from taxes and liability to ownership rights and access to capital.
If you’re considering a C corporation (C corp), understanding how it's set up, what it means for the business and its owners, and its benefits and drawbacks can help you determine whether it aligns with your plans.
What Is a C Corporation?
A C corp is a legal entity that is taxed independently from its owners under Subchapter C of the Internal Revenue Code.[1] The corporation can conduct business, earn income, pay taxes, and distribute profits to shareholders.[2]
How Does a C Corporation Work?
C corps are driven by three primary groups of decision-makers:
- Shareholders. Shareholders are the owners of the company. Ownership is held via stock in the company (whether private or public).[3] Shareholders may receive dividends issued by the corporation according to the rights associated with their shares.
- Corporate officers. Corporate officers are the executives who manage day-to-day operations. Positions vary by company but often include titles like chief executive officer (CEO), chief financial officer (CFO), chief operations officer (COO), and chief technology officer (CTO). These positions may be collectively referred toas “the C suite.”
- Board of directors. The C corp’s board of directors generally oversees the company’s performance and makes big-picture strategic decisions (such as appointing the corporate officers).
In some cases, a single person may be a member of multiple groups. For example, a founder might be a shareholder, serve as the CEO, and hold a board of directors’ seat.
Ongoing Requirements for a C Corporation
C corps are responsible for maintaining compliance with state and federal rules, including applicable securities laws set forth by the Securities and Exchange Commission (SEC). Additional ongoing requirements vary by state and industry and may include:
- Holding periodic shareholder and board meetings
- Keeping minutes documenting important meetings and decisions
- Maintaining corporate and financial records
- Filing periodic reports with the state
- Paying required state filing fees, franchise taxes, or other applicable costs
- Maintaining required licenses and registrations
How Are C Corporations Taxed?
For federal income tax purposes (and state income tax purposes in states that impose a corporate income tax), C corps are treated as independent entities. C corps report income and expenses on Federal Tax Form 1120.[2]
C corps may choose to distribute some of their after-tax profits to shareholders in the form of dividends. These dividends would then be reported to the IRS on each shareholder’s personal income tax filing and be subject to taxation.[9]
Double taxation is an important characteristic of C corps. Profits are taxed first as corporate income, paid by the corporation, and then taxed again as dividends, paid by individual shareholders via their personal income taxes. Dividends are not tax-deductible to the corporation.[2]
Corporations also aren’t required to distribute dividends and may choose to retain earnings in the business instead.[4] However, excessive retained earnings can potentially trigger an accumulated earnings tax, so corporations should work with tax professionals when deciding how to retain or distribute profits.[5]
What Are the Main Benefits of a C Corporation?
C corps offer several potential advantages, including:
- Limited liability protection. Because the corporation is a separate legal entity, shareholders generally aren't personally responsible for its debts and legal obligations.
- Access to capital. The ability to issue and sell stock gives corporations a means of raising funds from outside investors.
- The ability to issue multiple classes of stock. C corps may issue different classes of stock (such as common and preferred) that come with different rights.
- Perpetual existence. A corporation generally continues to exist independently of changes in its ownership, so it can survive a shareholder's death, departure, or sale of shares.
What Are the Disadvantages of a C Corporation?
Potential drawbacks of C corps may include:
- Double taxation. Corporate profits are taxed once at the corporate level and again when distributed to shareholders as taxable dividends.
- More complex administrative requirements. Corporations generally face more compliance requirements than sole proprietorships and LLCs, which may require additional time and attention to manage.
- Higher formation and operating costs. While costs largely depend on the state in which the C corp is registered, incorporation fees, annual state fees, accounting expenses, and legal costs can make a corporation more expensive to establish and maintain than a simpler business structure.
C Corporation vs. S Corporation (S Corp)
Like a C corp, an S corp is an independent entity, separate from the shareholders, providing limited liability to those shareholders. S corps may also be structured similarly to C corps, with shareholders, a board of directors, and a C-suite of officers.
Unlike a C corp, which generally pays federal income tax at the corporate level, an S corp is generally a ‘pass-through’ entity. Income, losses, deductions, and credits pass through to shareholders, who report their shares on their individual income tax returns, whether or not the income is distributed.[6]
C Corp vs. S Corp: Quick Comparison
| C Corp S Corp | S Corp |
| Pays corporate income tax s | No corporate tax — profits pass through to owners |
| Can have unlimited shareholders Limited to 100 shareholders | Can have unlimited shareholders Limited to 100 shareholders |
| Allows foreign and corporate shareholders | Only U.S. individuals can be shareholders |
| Best for raising investment and scaling | Best for small businesses wanting tax simplicity |
| More formal requirements and paperwork | Fewer formalities and easier ongoing compliance |
C Corporation vs. Limited Liability Company (LLC)
An LLC is a flexible business structure that can provide liability protection for its owners (called members) without necessarily requiring the management structure of a corporation.
Regulations governing LLCs vary by state, but for federal income tax purposes, LLCs may be treated as a partnership, disregarded entity, S corp, or C corp, depending on its ownership and tax elections. This means an LLC can elect to be taxed as a C corp without changing its underlying LLC business structure.
A C corp may offer more structure for growth, particularly as it pertains to issuing stock to investors. An LLC may be a simpler, more flexible solution for smaller businesses.
C Corp vs. LLC: Quick Comparison
| C Corp | LLC |
| Separate legal entity taxed at the corporate level | Pass‑through taxation by default (profits taxed on owners’ returns) |
| Can issue stock and attract investors | Ownership is flexible but doesn’t use stock; harder to raise major investment |
| Unlimited shareholders allowed | Members can be individuals or entities; no limit on number |
| More formal structure with required bylaws, board, and meetings | Fewer formalities; easier to manage day‑to‑day |
| Best for businesses planning to scale or seek outside capital | Best for small businesses wanting simplicity and liability protection |
How Do You Form a C Corporation?
The incorporation process varies by state, but generally involves:[8]
- Choosing a business name. Confirm that your chosen name is available and complies with state rules.
- Filing the formation document. Submit the articles of incorporation to the appropriate state agency and pay the filing fee.
- Opening a business bank account. Establish a business bank account early for clean financial records.
- Appointing directors to the board. Directors will oversee the establishment of the corporation.
- Adopting corporate bylaws. Bylaws establish internal rules of operation.
- Issuing stock. Establish ownership by issuing authorized stock to the corporation's initial shareholders while complying with applicable securities laws.
- Obtaining required tax IDs and registrations. As an independent taxpayer entity, your C corp needs an Employer Identification Number (EIN) from the IRS. You may also need state tax accounts, business licenses, permits, or other registrations, depending on your industry.
Who Should Consider a C Corporation?
A C corp may be well-suited to a business that:
- Plans to seek venture capital or other outside investment
- Has significant long-term growth goals
- Wants the ability to issue different types or classes of stock
- Values a formal organizational structure
- Expects leadership to change or expand over time
Is a C Corporation Right for You?
Despite the double taxation, C corps are a popular business structure for many companies. C corps offer liability protection for shareholders, the ability to raise capital through stock offerings, and the structure that supports longstanding business operations, even when there are leadership changes.
Choosing the right business structure ultimately depends on your long‑term goals, how you plan to manage taxes, and the level of liability protection you need. Because it is a critical component, affecting your income, taxes, and liability, it’s worth discussing your options with attorneys and tax professionals who can guide you to make the right decision for you and your business.
