What Is a C Corporation?

C corporations (C-corps) are a common business entity. Their name comes from Subchapter C of the Internal Revenue Service’s (IRS’s) tax code.

The main advantage of a C corporation is that it provides limited liability protection to their owners. However, the main disadvantage of a corporation is double taxation. Double taxation is when a company pays a corporate tax on profits and then the owners pay a tax on dividends on their personal income tax returns.

Need help with business formation? Our trusted partner LegalZoom makes it easy—packages start at $0 + state filing fees.

Key Takeaways

• C-corps are a default tax status with the IRS.

• C-corps limit personal liability and have a traditional set of rules.

• C-corps are subject to double taxation, which has advantages and disadvantages.

• C-Corps may elect for S-Corp status with the IRS to become a pass-through entity

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 liability for owners. Think of it this way: An owner’s personal assets are not subject to the financial and legal risks 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, called minutes, must be kept for transparency

• Voting records of directors must be preserved

• C-corps must maintain 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

• File articles of incorporation with the secretary of state

• Write bylaws

• Issue shares of stock to potential shareholders

• Obtain a federal tax I.D. number, also known as an Employer Identification Number (EIN)

• Establish a board of directors to run the company who then elect officers to run the day-to-day operations

• Hold an initial board meeting

A corporation has ongoing obligations as well such as filing annual reports with the state.

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 called double taxation.

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.

Can you avoid double-taxation?

Yes, a business owner can elect for an S corporation (S-corp) by filing Form 2553 with the IRS. If the corporation receives a determination letter,

then the corporation does not pay corporate income tax. The profits can then pass through to the individual’s personal income tax returns.

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