A C corporation (C-corp) is a business structure typically used by larger companies or those seeking investments. Many business owners who opt to organize as a C-corp do it because they are required to, for instance if they have more than 100 shareholders. Other owners choose a C-corp structure to attract investors such as those who own high growth startups. The main downside to a C corporation is that it’s taxed twice—at the corporate level (21%) and the individual level.
Why Choose a C Corporation?
C corporations can get complicated. You first need to know that a C corporation is a corporation that doesn’t have S corporation (S-corp) tax status. What does that mean?
Once you register your business as a corporation with the state, you can choose to be an S-corp or a C-corp. Congress created the S-corp (the S stands for small business) in 1958, so smaller businesses could save money on taxes. They avoid paying the corporate tax—currently 21%.
Avoiding taxes sounds great—why would anyone want to own a C corporation and pay more taxes? The answer is that because Congress designed the S-corp for small businesses, it has restrictions that disqualify high-revenue corporations.
These restrictions include having no more than 100 shareholders, no foreign shareholders, and only one class of stock. For example, if you have two classes of stock (common and preferred), you must become a C-corp and pay the 21% corporate tax. You may want two stocks to appeal to different investors—common stockholders have voting rights and preferred stockholders get paid first during a bankruptcy.
The other main reason someone may choose to start their business as a C-corp is to attract investors like Angels or Venture Capital. Investors prefer C corporations for many advantages, including the ability to issue preferred stock and make an initial public offering (IPO) if the business is successful.
Who C Corporations Are Right For
- Larger companies: Unlike S corporations, which are limited to 100 shareholders, there are no limits on how many shareholders a C corporation can have.
- Businesses with foreign owners: The shareholders of a C corporation do not have to be citizens of the United States. In contrast, S corp shareholders must be US citizens or residents.
- Businesses owned by another corporation, LLC, or trust: A C-corp can be owned by another corporation, LLC, or trust, whereas an S corp can only be owned by natural persons.
- Businesses with several types of shareholders: Shareholders of a C corporation can have different voting rights. For example, you can give your founders greater voting rights than those who invest later.
- Companies going public: The majority of publicly traded corporations are C corporations, because the structure doesn’t limit how many shareholders they can have. Additionally, C corporations can issue common stock with fewer voting rights than other shareholders.
- Businesses seeking venture capital or equity investors: As with publicly traded companies, businesses seeking venture capital or equity investors should also organize as a C corporation to avoid limitations on shareholders and to control shareholder voting rights.
Which Business Structure is Right for You?
Advantages & Disadvantages of a C Corporation
C corporations offer limited liability protection for owners and the opportunity for unlimited growth. However, classifying your business as a C corporation will lead to double taxation, heavier regulation, and higher administrative costs than other business structures.
C Corporation Advantages
- Limited liability: Generally, corporate shareholders are not personally liable for the debts, liabilities, and obligations of the C corporation.
- No limit on shareholders: Unlike S-corps, C corporations are not limited to 100 shareholders. C-corps are an excellent option for businesses that intend to go public or have a large number of shareholders.
- Open to international business owners: A C corporation’s shareholders are not limited by citizenship or residence. In contrast, S corporations restrict shareholders to US citizens or residents.
- Ability to take on investors: Unlike S corps, C corporations aren’t limited to non-entity investors. This means your C-corp can accept investments from individuals, partnerships, or other corporations.
- Flexible shareholder voting: C corporations can issue multiple classes of stock with different voting rights. S-corps can only issue common stock.
- Tax-deductible business expenses: A C corporation can deduct business expenses like salaries, rents, advertising costs, and employee benefits on its tax return.
C Corporation Disadvantages
- Double taxation: C corporations are taxed first on their profits at the corporate level and then as dividends on shareholders’ individual tax returns.
- Expensive to set up: In addition to state-specific filing fees between $50 and $500, filing for C corporations is a complex process that may require you to hire an attorney.
- Heavily regulated: C corporations must follow strict meeting, record-keeping, and other operational requirements.
- No personal deduction of losses: Unlike business structures like LLCs, S corporations, and partnerships, you can’t deduct the losses of your C corporation on your personal tax return. These deductions are limited to the corporation’s return.
C Corporation Costs
Incorporation can be an expensive process because it requires you to draft and file detailed articles of incorporation. State-specific filing fees range from $50 to $500. Due to the complexities of incorporating, you may need to hire an attorney for $100/hour to $500/hour.
Overall, plan to spend $50 for a simple corporation that you register yourself to more than $5,000 to form your C corporation with the assistance of an attorney.
Specific costs associated with forming a C-corp include:
- State filing fees: $50 to $500
- Attorney fees: $500 to $5,000
To determine your state’s filing fees, visit your state’s official business registration website. On the website you can also learn the documents required to file your corporation, which will likely include the articles of incorporation and bylaws.
C Corporation Taxes
C corporations are governed by Subsection C of the Internal Revenue Code and taxed twice: once on corporate profits and again on shareholder dividends that are reported on personal tax returns. This tax structure can lead to high tax bills for shareholders. Still, you can reduce your tax liability by keeping as much money in the corporation as possible.
Breakdown of C-Corp Taxes
Type of Tax
|Corporate Tax Rate|
|Dividend Tax Rate|
FICA - Social Security
FICA - Medicare
How to Reduce Corporate Taxes
You can avoid or reduce double taxation of your C corporation 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.
- Limit salaries: If you have a small number of shareholders, consider paying a small salary to shareholders and retaining the corporation’s profit. Retaining profit reduces your shareholder’s individual tax bill while allowing the corporation to deduct salaries as a business expense.
You can also reduce your tax liability by deducting other business expenses, including 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.
C Corporation Liability Protection
C corporation 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. Their personal assets including their homes and other assets are at risk for being seized.
Make sure owners aren’t personally operating the business and follow legal formalities like taking meeting minutes to retain liability protection for shareholders. Have positions available, including one for treasurer and secretary, to keep corporation responsibilities separate.
C Corporation Shareholders Explained
Since one of the advantages of having a C-corp is the unlimited shareholders, it’s vital that you understand the nuances. There are no restrictions regarding a shareholder’s citizenship or whether it’s a natural person or business entity.
C corporation shareholders have voting rights and dividends based on whether they have common or preferred stock. Common stock is ownership in a corporation that gives the holder the right to one vote (per share) for the board of directors and other corporate decisions. This type of stock is typically the publicly-traded stock you can purchase on exchanges like the NYSE or Nasdaq, such as Facebook or Apple.
Conversely, preferred stock typically doesn’t give the holder voting rights. Still, it typically has a fixed dividend that’s distributed before common stock dividends. These shares are most commonly held by investors and key decision-makers (in addition to common stock).
The specific rights of common stockholders can vary depending on the company. Common stock generally gives shareholders voting rights proportionate to their ownership. Common stockholders also have preemptive rights to purchase additional stock when new stock is issued so they can retain their ownership and voting percentage.
One downside is that common stockholders are the last to be paid dividends.
A corporation’s common stock can be divided into several classes, each with its own voting rights.
For example, Facebook has Class A common shares, which are available through the New York Stock Exchange and are entitled to one vote per share. They also provide Class B common shares, which are controlled by Facebook insiders and entitled to 10 votes per share.
This kind of stock structure takes management decisions away from certain shareholders. It protects officers and the board of directors from investors.
Instead of having voting rights in the corporation, preferred stockholders benefit from the peace of mind that comes from getting paid first. Preferred stock entitles a shareholder to fixed dividends before common shareholders are paid.
Preferred stockholders generally don’t have voting rights, but have rights to corporate assets before common stockholders.
A C corporation may issue preferred stock, so it can defer payments in times of reduced cash flow. Alternatively, a C-corp may issue convertible preferred stock to retain the flexibility to convert preferred stock into common stock later.
Issuing preferred stock is an excellent way for a business to raise capital quickly without giving away decision-making power to investors. Investors often want preferred shares, because they offer stable payouts and are paid first in bankruptcy.
C-Corp Management Structure
Unlike LLCs, C corporations 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, Treasurer, and Secretary. Include this information in your Articles of Incorporation.
Required C corporation managers include:
- President: The president 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 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.
How to Set Up a C Corporation
Overall, setting up a corporation is complex. Setup requires state-specific articles of incorporation and applying for a federal employer identification number (EIN). C corporations are heavily regulated, so familiarize yourself with your Secretary of State’s requirements before incorporating.
If you’re setting up a simple C-corp with a templated Articles of Incorporation and a small number of shareholders, you may be able to do it yourself or use an online legal service such as Rocket Lawyer. However, if your corporation is complicated, then you should consider working with a small business attorney.
Are you registering a corporation yourself? Here are five steps to take:
- Choose your business name: The first step to form a C corporation is to choose a name and confirm its availability in your state. Determine your name’s availability by checking your state’s official business registration website.
- Determine your leadership structure: State rules may differ, but typically you’ll need to appoint a director, which is a liaison for the shareholders. You’ll also need to appoint officers, including a president, vice president, and treasurer.
- Draft your articles of incorporation: These documents are a formal requirement by your state. They need to include specific information such as the business name, business structure, and purpose of the corporation.
- Draft your bylaws: More informal than the articles of incorporation, the bylaws explain the C-corp’s operational procedures. The document will outline procedures like selecting a director, removing a director, and pay for officers and directors.
- Apply for tax identification numbers and business licenses: Before hiring employees and engaging in business, your corporation must apply for federal, state, and local tax identification numbers and business licenses. This can be done through your state’s official business registration website.
- Establish record-keeping procedures: One aspect that makes corporations different from other business structures is record-keeping requirements. Ensure someone is documenting shareholder information, capital contributions, and meeting minutes.
As you can see, registering and maintaining a C corporation involves many legal steps and documents. It can get complicated quickly—especially if you don’t have a legal background. And if you miss a section in your bylaws, it could result in confusion and legal issues down the road.
If you try to create your own C-corp and need assistance, consider speaking with an attorney at an online legal service, like Rocket Lawyer, or connect with a local business attorney.
Alternatives to the C Corporation
Because of double taxation and record-keeping requirements, a C corporation isn’t appropriate for most small businesses. You may be able to reduce your tax bill and regulatory requirements by choosing another business structure. If you want to retain liability protection while avoiding double taxation, consider either the LLC or S corporation.
Here’s a list of business structures and who they’re best for:
- S corporation (S-corp): This designation is a tax status. Both LLCs and corporations can elect to be an S corporation. If your corporation doesn’t elect S-corp tax status, then it becomes a C-corp.
- Limited liability company (LLC): Companies that want 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 the 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 your personal assets are protected.
Frequently Asked Questions (FAQs) About C Corporations
What Is the Difference Between a C Corporation and an S Corporation?
In contrast to C corporations, S corporations are only taxed at the personal level. S corporations are also limited to up to 100 US citizen shareholders, while C corporations can have unlimited domestic and foreign investors. And lastly, S corporations are limited to one class of stock, whereas in contrast, C corporations can issue common and preferred stock.
What Is the Difference Between an S-Corp, a C-Corp, and an LLC?
LLCs and S and C corporations offer owners liability protection against the obligations of the business. However, taxation differs because LLCs and S corporations are only taxed through their owners’ personal tax returns. C-corps are taxed twice. Organize as an LLC if you want to retain flexibility in how your small business is managed and taxed.
What Are the S-Corp vs C-Corp Tax Advantages?
A significant tax advantage of S corporations 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. C corporations are taxed at the corporate and shareholder level. Still, they are advantageous for companies where shareholders receive salaries instead of dividends.
C corporations are business entities that provide liability protection to owners and maintain more flexible voting and ownership structures than S corporations. C corporations are taxed at both the corporate and shareholder level but offer tax benefits like business expense deductions. You should organize your business as a C-corp if you have a large company or plan to grow quickly with investors.