C Corporation

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C Corporation

Key takeaways

  • A C corporation (C corp) is a legal entity separate from its owners (shareholders).
  • C corps provide limited liability protection; shareholders generally risk only their investment.
  • Corporate profits are taxed at the corporate level and again when distributed as dividends (double taxation).
  • C corps must maintain formal governance (board of directors, annual meetings, minutes, bylaws) and file required reports and taxes.

Overview

A C corporation is the most common corporate form for larger businesses. It issues stock to owners (shareholders), operates under a board of directors, and is taxed as a separate entity. Because the corporation is distinct from its owners, it can continue regardless of changes in ownership or management.

How C corporations work

  • Taxation: C corps pay corporate income tax on profits. When profits are distributed as dividends, shareholders pay personal income tax on those dividends, creating double taxation. The statutory corporate tax rate is 21%.
  • Governance and records: C corps must establish a board of directors elected by shareholders, adopt and keep bylaws, hold annual shareholder and director meetings, and keep minutes and voting records. They commonly file annual reports and financial statements.
  • Ownership and capital: C corps can have an unlimited number of shareholders and can raise capital by issuing stock. Public offerings trigger registration requirements with the Securities and Exchange Commission (SEC).
  • Regulatory reporting: Corporations may have state and federal filing requirements for income, payroll, unemployment, disability taxes, and industry-specific regulations.

How to form a C corporation

  1. Choose and register a business name (ensuring it’s available in your state).
  2. File articles of incorporation with the Secretary of State in the state where you form the corporation.
  3. Draft and adopt corporate bylaws and appoint an initial board of directors.
  4. Issue stock to shareholders.
  5. Obtain an Employer Identification Number (EIN) by filing IRS Form SS-4.
  6. Comply with federal, state, and local tax and licensing requirements.

Advantages

  • Limited liability protection for shareholders, directors, officers, and employees.
  • Ability to raise substantial capital through issuance of stock.
  • Perpetual existence independent of the lives of individual owners.
  • Clear separation between ownership and management, which supports institutional governance and investment.

Disadvantages

  • Double taxation: corporate profits taxed at the entity level and again when distributed as dividends.
  • Higher formation and ongoing compliance costs compared with simpler entity types (e.g., sole proprietorship, partnership, LLC).
  • Greater regulatory and reporting requirements, which can increase legal and administrative expenses.
  • Shareholders cannot generally deduct corporate losses on personal tax returns.

C Corporation vs. S Corporation

  • Taxation: C corps are taxed at the corporate level and then shareholders are taxed on dividends. S corporations are pass-through entities: income, losses, and credits pass through to shareholders and are taxed at the individual level (no corporate income tax).
  • Ownership limits: C corps can have unlimited shareholders and different classes of stock. S corps are limited to 100 eligible shareholders and must meet ownership restrictions (e.g., shareholders must be individuals, certain trusts, or estates).
  • Suitability: S corp status may benefit smaller, closely held businesses seeking pass-through taxation; C corp status is often chosen by businesses planning to raise significant capital or go public.

C Corporation vs. LLC

  • Liability protection: Both provide limited liability protection.
  • Tax treatment: LLCs typically operate as pass-through entities by default (members report profits/losses on personal tax returns), though they can elect corporate taxation. C corps are taxed separately.
  • Formality and scalability: C corps require more formal governance and compliance, which can make them more scalable for large investments and public markets.

Reporting corporate income

C corporations report federal corporate income using IRS Form 1120. In addition to income tax filings, corporations must handle payroll tax obligations (Social Security, Medicare) and applicable state and local tax filings.

Regulatory note

The Corporate Transparency Act—intended to reduce illicit use of shell companies—created a beneficial ownership reporting framework. Implementation and reporting requirements have been subject to regulatory changes; corporations should consult current guidance from federal agencies and legal counsel for compliance.

Conclusion

A C corporation provides strong liability protection and capital-raising advantages but brings greater formality, regulatory obligations, and the potential for double taxation. It is commonly chosen by businesses seeking to scale, attract institutional investors, or become publicly traded.

Further reading

  • Internal Revenue Service — Form 1120 and Publication 542 (Corporations)
  • U.S. Small Business Administration — Choose a Business Structure
  • U.S. Securities and Exchange Commission — Registration under the Securities Act of 1933