What Is a C Corporation?

C corporations (C-corps) are one of the most common ways to organize a business. Their name comes from Subchapter C of the Internal Revenue Service's (IRS's) tax code.

While prevalent, business owners should note that C-corps are subject to double taxation. As business entities, they are taxed separately from their owners or shareholders. This means their profits are taxed first at a corporate level and again when distributed to shareholders.

S corporations (S-corps), which are similar to C-corps, are not subject to double taxation.

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Key Takeaways

• C-corps are a common business structure because they limit liability and have a traditional set of rules.
• Organizing into entities like C-corps are a crucial first step in conducting business.
• C-corps are subject to double taxation, which has advantages and disadvantages.

Understanding C Corporations

C-corps are taxed under Subchapter C of the Internal Revenue Code. There are no limits to the number of shareholders and there are few restrictions on who can own shares. For this reason, C-corps are often more attractive to large corporations than small business owners.

Like limited liability companies (LLCs) and S-corps, C-corps limit personal risk for owners and employees. Think of it this way: An owner's personal assets are not subject to the financial and legal burdens of the C-corp. This protection does not extend to illegal conduct or companies that fail to follow the required corporate formalities, but it offers sound peace of mind for business owners and directors.

In addition to limiting personal risk, C-corps must follow some standard business guidelines:

• C-corps must hold annual meetings for directors and owners/shareholders
• A record of the annual meeting must be kept for transparency
• Voting records of directors must be preserved
• C-corps must preserve a list of the owners and the percent that they own

Organizing a C Corporation

Organizing a business in the form of an entity like a C-corp is an essential first step in operating a legal business. Organizing makes things official, allowing the business to be taxed and regulated.

To organize, a C-corp must:

• Choose its business name and register it with its state
• Choose bylaws and file articles of incorporation with their secretary of state
• Offer shares of stock to potential shareholders
• Obtain their federal tax I.D. number, also known as an Employer Identification Number (EIN)
• Establish a board of directors to run the company

Regarding Double Taxation

C-corps are legal entities separate from their owners. The company pays taxes on its earnings before distributing the remaining dividends to its shareholders. Shareholders then pay income taxes on these dividends. This is viewed as a disadvantage of C-corps.

So, are there tax benefits for a C-corp? In some situations the tax code allows C-corps to hold on to a portion of their profits. C-corps can then take that portion and reinvest it back into the company. That means it will not be distributed as dividends and taxed a second time. Additionally, this may result in the business's profits being taxed less than they would have been for an S-corp, where the profits may be taxed at a higher rate on personal income.

Questions About Forming a C-Corp? Consult an Attorney

Whether on your own or with a group of co-owners, forming a C-corp can be a complex and daunting process. New business owners often face specific issues or circumstances that need careful consideration. It's always best to contact a business lawyer who can advise you on whether a C-corp really is the best way to structure your business and assist you with setting it up.

Related Terms

• Checklist: Starting a Corporation
• Corporate Structure: From Directors to Shareholders