What Is a C-Corporation? Structure, Taxes, and Requirements

So, what is a C-corporation? It’s the standard form of corporation in the United States: a legal entity separate from its owners that pays its own income tax. That separate tax is the catch. Profits get taxed once at the corporate level and again when they’re paid out to shareholders as dividends. In return you get the strongest liability protection, no limits on who can own shares, and the structure venture investors expect.

What is a C-corporation, and how does it work?

If you form a corporation and don’t make any special tax election, you have a C-Corp by default. The “C” refers to Subchapter C of the Internal Revenue Code, which governs how these corporations are taxed.

Because a C-Corp exists independently of its owners, it can own property, sign contracts, borrow money, sue and be sued, all in its own name. That separation is what protects shareholders’ personal assets from the business’s debts and lawsuits.

The structure has three layers. Shareholders own stock and elect the board of directors, and their liability is typically limited to what they invested. The board oversees strategy and major decisions and owes the corporation fiduciary duties. Officers, such as the CEO, CFO and Secretary, run the business day to day. The bylaws set the internal rules: meetings, voting procedures and officer responsibilities.

How is a C-Corp taxed?

The corporation pays federal income tax on its profits at a flat 21%. When it distributes what’s left as dividends, shareholders pay personal income tax on those dividends. That’s double taxation.

Here’s what it looks like on $100,000 of profit, assuming every dollar is paid out and the shareholder pays the top qualified dividend rate:

Can you reduce double taxation?

Yes. The example above is the worst case, where every dollar goes out as a dividend. Four legal strategies shrink the second layer:

• Retain earnings. Profits kept in the company aren’t taxed at the shareholder level. They can fund growth instead.
• Pay reasonable salaries. Owners who work in the business can take a salary, which the corporation deducts. Dividends aren’t deductible.
• Provide fringe benefits. The corporation can deduct benefits like health insurance, life insurance and retirement contributions that aren’t taxable to employees.
• Qualified Small Business Stock (QSBS). Shareholders may exclude up to $10 million in capital gains when they sell stock in a qualifying C-Corp held for 5+ years.

There’s a limit on retaining earnings, though. If a C-Corp keeps too much profit without a valid business purpose (generally over $250,000), the IRS may impose a 20% accumulated earnings tax on the excess.

What are the advantages of a C-Corp?

No ownership restrictions. A C-Corp can have unlimited shareholders, foreign and domestic. Corporations, partnerships and trusts can own shares, and you can issue multiple classes of stock, such as common and preferred. An S-Corp can’t do most of that.

Investors expect it. Venture capitalists and institutional investors often prefer or require a C-Corp. They want preferred stock with special rights, and they want a familiar legal framework with a clear path to an IPO. Only C-Corps can go public and list shares on a stock exchange.

Strong liability protection and perpetual existence. Shareholders generally can’t be held personally liable for corporate debts or lawsuits. The corporation keeps existing no matter how often shares are bought, sold or transferred.

Tax-advantaged benefits. The corporation can deduct certain benefits that are tax-free to employees, including health insurance premiums (100% deductible), group term life insurance up to $50,000, disability insurance, educational assistance and dependent care assistance.

What are the downsides?

Double taxation is the big one if you plan to pull most of the profit out of the business.

The paperwork is the other. A C-Corp files its own federal return (Form 1120) and annual reports with the state. To keep its liability protection, it has to observe corporate formalities: annual shareholder and director meetings, minutes for major decisions, bylaws that are actually followed, and business money kept completely separate from personal money. You may need to pay for professional help with taxes and compliance.

How do you form a C-Corporation?

1. Choose your state. You can incorporate anywhere. Delaware and Nevada are popular for their business-friendly laws, but for most small businesses, your home state makes more sense. Incorporate elsewhere and you’ll usually have to register in your home state too.
2. Pick a name. It has to be distinguishable from existing businesses in the state, include a designator like Inc., Corp. or Incorporated, avoid implying a government connection, and skip restricted words unless you have the right license.
3. Appoint a registered agent with a physical address in the state to receive legal documents and official mail.
4. File Articles of Incorporation (some states call it a Certificate of Incorporation). It usually lists the corporation’s name, registered agent, number and type of authorized shares, incorporator, and business purpose, which can be general.
5. Write bylaws covering meetings, voting, officer roles, stock issuance and how to amend the bylaws.
6. Hold the organizational meeting. The initial board adopts the bylaws, appoints officers, authorizes stock issuance, opens a bank account and sets the fiscal year.
7. Issue stock to your initial shareholders in exchange for their capital contributions.
8. Get an EIN from the IRS. You’ll need it for taxes and for business bank accounts.

What does a C-Corp have to file every year?

Beyond those, you’ll pay estimated quarterly taxes, withhold and remit payroll taxes for employees, keep minutes and records, and file amendments with the state when something significant changes.

How does a C-Corp compare with other structures?

Should your business be a C-Corp?

A C-Corp makes sense if you plan to raise venture capital, want to go public someday, need foreign investors, or want to reinvest profits rather than pay them out. It also fits if generous employee benefits are part of your plan.

It usually doesn’t make sense for a solo owner or a small business that pays most of its profit to the owners. An LLC or an S-Corp gives you single-level taxation with far fewer formalities.

Our take: if outside investment isn’t in your plans, start with an LLC. You can convert to a C-Corp later, when an investor actually asks for it.

Frequently asked questions

What’s the difference between a C-Corp and an S-Corp?

Taxation. A C-Corp pays corporate tax, and shareholders pay tax again on dividends. An S-Corp passes income through to shareholders, who pay tax on their personal returns. S-Corps also have ownership restrictions that C-Corps don’t.

Can a C-Corp become an S-Corp?

Yes. If the corporation meets the S-Corp eligibility requirements, it can elect S-Corp status by filing IRS Form 2553.

Are C-Corps more expensive to run?

Generally, yes. Formation costs are higher, compliance is ongoing, and you may need professional help with tax filings and governance.

Can a C-Corp have one owner?

Yes. A C-Corp can have a single shareholder, and that person can also be the sole director and officer.

Before you incorporate

Run your own numbers through the double taxation example above, using what you actually expect to pay yourself and what you’d leave in the business. Then take that to an accountant. If the C-Corp only wins in a scenario where you raise money, it’s worth asking whether you need to be a C-Corp today or just ready to become one.