What Is a C Corporation: Tax Treatment, Liability & More
A C corporation (C-corp) is a business structure typically used by larger companies or those seeking funds from investors. Many business owners who opt to organize as a C-corp do it because they are required to; for instance, if they have over 100 shareholders. Other owners choose it to attract investors, such as those who own high-growth startups. The main downside to a C-corp is that it’s taxed twice—once at the corporate level (21%) and another at the shareholder level when dividends are paid.
Key Takeaways
- C-corps provide limited liability
- C-corps offer a range of business expense deductions
- C-corps are taxed twice: at the corporate level (21%) and the shareholder level
- C-corp shareholders cannot deduct business losses from other income
- The business structure makes it easier to attract equity investors
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C Corporation Advantages & Disadvantages
Advantages | Disadvantages |
|---|---|
Doesn’t hold shareholders personally liable for the debts, liabilities, and obligations of the corporation | Is taxed twice: first on their profits at the corporate level and then again as dividends on shareholders’ individual tax returns |
Can have unlimited shareholders; ideal for public companies or those with many shareholders. | Has complicated filing and may require a counsel; state-specific filing fees range from $50 to $500 |
Allows stockholders to be from any country | Must follow strict meeting, record-keeping, and other operational requirements |
Allows non-individual investors; your C-corp can take investments from individuals, partnerships, and other corporations | Cannot deduct losses on shareholder l tax returns; deductions are limited to the corporation's return |
Can issue multiple classes of stock with different voting rights | |
Can deduct salaries, rentals, advertising, and employee benefits on the corporate tax returns |
C Corporation Tax Treatment
C-corps are taxed twice: the corporation pays tax on profits and the shareholders pay tax again when profits are paid out as dividends. This tax structure can lead to high tax bills when combining corporate and shareholder taxes. Still, you can reduce your tax liability by keeping as much money in the corporation as possible and minimizing dividend payments.
Expert tip from Tim Yoder, CPA: Minimizing dividends is generally a good idea, but the IRS has a couple of weapons to fight the nonpayment of dividends if it becomes excessive.
First, it can assess the accumulated earnings tax, which is a penalty tax in addition to the normal income tax if you don’t have a legitimate business reason for retaining earnings in the corporation. Second, you might have to report and pay the personal holding company tax if your corporation has a lot of investment earnings and is not paying dividends to shareholders.
Breakdown of C-corp Taxes
In addition to corporate income taxes, C-corps must pay payroll taxes for wages paid to their employees and shareholders must pay income tax on dividends received.
Type of Tax | |
|---|---|
Corporate Income Tax Rate | 21% paid by C-corp |
Dividend Tax Rate | 0% to 20% paid by shareholders |
Self-employment Tax | Corporate income nor dividends are subject to self-employment tax |
FICA - Social Security | 6.2% of employee salary/wages, up to a maximum wage of $160,200 (2023 tax year) |
FICA - Medicare | 1.45% of employee salary/wages |
FUTA | 6% on the first $7,000 that each employee earns |
How To Reduce C-corp Taxes
You can avoid or reduce double taxation of your C-corp by
- Withholding dividends: Eliminate the second layer of taxation by reducing or eliminating shareholder dividends. Instead, reinvest this money back into the corporation and save taxes for your shareholders if they can afford to delay dividends.
- Paying shareholders a salary: If your corporation’s profits are primarily related to operations, pay your shareholders a salary instead of dividends. Paying a salary prevents your corporation’s earnings from being taxed twice—once at corporate tax rates and a second time as taxable dividends.
- Limiting salaries: While paying salaries does avoid the double taxation of paying dividends, it creates a payroll tax liability. If you have a small number of shareholders, consider minimizing their salary and retaining the corporation’s profit. Retaining profit avoids both the double taxation on dividends and the payroll tax on salaries. Of course, the shareholder/employee may not be willing to forego salary unless they own most or all of the corporation.
- Reimbursing shareholders for expenses paid personally: Be sure to reimburse any shareholders that pay business expenses from their personal funds. These reimbursements are deductible by the corporation and non-taxable to the shareholders, creating a tax-free way to remove earnings from the corporation.
- Deducting other business expenses: These expenses include employee health plan costs, equipment, and professional services like tax preparation and accounting. Also, track and deduct more common expenses like rental costs, utilities, travel expenses, and other overhead costs associated with running the corporation.
Take a look at our article on the IRS business expense categories list to learn more about business expenses. It includes a free downloadable worksheet.
C Corporation Liability Protection
C-corp shareholders are generally not liable for the corporation’s debts or obligations. Instead, liability is limited to their financial interest in the corporation, and third parties looking to satisfy debts must look to the corporation itself. This protection doesn’t apply under certain circumstances, so ensure your corporation takes adequate steps to protect shareholders from liability.
Corporate shareholders can still be held liable when there isn’t enough legal separation between the corporation and its shareholders. If the corporation behaves recklessly or fraudulently, then shareholders without separation can be held liable as well—and their personal assets, such as their homes, are at risk of being seized.
Make sure owners aren’t using the C-corp’s funds as their personal checkbook. Also, follow legal formalities, like taking meeting minutes, to retain liability protection for shareholders.
C Corporation Management Structure
Unlike LLCs, C-corps must have officers who handle day-to-day operations. The standard management responsibilities of officers generally include executing policies established by the board of directors and overseeing the business’ finances and records.
Every C-corp must have a president, vice president, treasurer, and secretary. Include this information in your articles of incorporation:
- President: This person handles the overall day-to-day operations of the business. Their tasks may include signing critical legal documents, meeting with other officers, and handling high-level employment matters.
- Vice president: The vice president’s role is flexible and will meet the duties assigned by the board of directors. In a larger corporation, several vice presidents oversee areas of the business such as marketing or sales.
- Treasurer: Also known as the chief financial officer (CFO), the treasurer manages financial matters. They will oversee the preparation of financial documents and financial record keeping.
- Secretary: The secretary handles record-keeping requirements such as maintaining shareholder and board of directors’ minutes. Shareholders can request certain corporate records, and the secretary may handle that communication.
Common Shareholders vs Preferred Shareholders
Common Shareholders | Preferred Shareholders | |
|---|---|---|
Voting Rights | ✓ | ✕ |
Publicly-traded Stock | ✓ | ✓ |
Fixed-rate Dividends | ✕ | ✓ |
Preferential Right to Dividends | ✕ | ✓ |
Common shareholders are what most people think of when referring to a shareholder—they own part of the corporation and get to vote for the corporate board. While many corporations strive to pay common shareholders dividends regularly, there is no guarantee of dividends. Some companies never pay common dividends.
Meanwhile, preferred shareholders are more like bondholders. They don’t have a right to vote in corporate matters and they are paid a set dividend percentage that is specified in their class of preferred stock. While the dividends are not guaranteed, preferred dividends must be paid in full before any dividends can be paid to common shareholders.
C Corporation Alternatives
Because of double taxation and record-keeping requirements, a C-corp isn’t appropriate for most small businesses. You may be able to reduce your tax bill and regulatory requirements by choosing another business structure:
- S corporation (S-corp): This designation is a tax status. Both LLCs and corporations can elect to be an S-corp. If your corporation doesn’t elect an S-corp tax status, then it becomes a C-corp.
- Limited liability company (LLC): Companies wanting to simplify state administration requirements, maintain liability protection for owners, and easily divide profits and responsibilities among members.
- Sole proprietor/partnership: The structure is for owners who don’t want the hassle of complex state filing requirements and don’t need legal protections for their personal finances.
Unless your business is very low risk and has little chance of being sued by a customer or vendor, you will want to register as a legal entity—an LLC or corporation. Do this before you start your business so that your personal assets are protected. If you need help deciding, read our LLC vs S-corp vs C-corp comparison.
Frequently Asked Questions (FAQs)
In contrast to C-corps, S-corps are only taxed at the shareholder level. S-corps are also limited to up to 100 US citizen shareholders while C-corps can have unlimited domestic and foreign investors. Lastly, S-corps are limited to one class of stock while C-corps can issue common and preferred stock.
LLCs and S-corps and C- corps offer owners liability protection against the obligations of the business. However, taxation differs because LLCs and S-corps are only taxed through their owners’ personal tax returns. Meanwhile, C-corps are taxed twice. Organize as an LLC if you want to retain flexibility in how your small business is managed and taxed.
A significant tax advantage of S-corps is that they experience “pass-through” taxation, meaning they aren’t taxed at the corporate level. Instead, corporate profits, losses, credits, and deductions are reflected on individual shareholder returns. Meanwhile, C-corps are taxed at both the corporate and shareholder level.
Bottom Line
C-corps are business entities that provide liability protection to owners and maintain more flexible voting and ownership structures than S-corps. C-corps are taxed at both the corporate and shareholder level but have much more flexibility than S-corps in the types of stock they can issue and their eligible shareholders. You should organize your business as a C-corp if you have a large company or want to attract investors.
