A C corporation is a business structure reserved for larger public companies or those seeking investments. This is because, unlike LLCs and S-corps, administration is expensive and owners are subject to double taxation. Understanding what a C corporation is important for liability protection and the ability to have unlimited shareholders, different voting classes, and foreign business owners.
How C Corporations Work
A C corporation is a corporate structure treated as a separate entity from its owners, known as shareholders, as well as the directors who operate the company. C corp profits are taxed at the corporate level, and any profit distributions to shareholders in the form of dividends are taxed again. However, the structure makes C corporations advantageous for businesses that want to take on investments, grow, go public, as well as limit liability.
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, but typically has a fixed dividend that’s distributed before common stock dividends. These shares are most commonly held by investors as well as key decision-makers (in addition to common stock). C corporations can have unlimited shareholders and there are no restrictions regarding a shareholder’s citizenship or whether it’s a natural person or business entity.
C corporations are taxed on profits at a rate of 21 percent, and shareholder profits (or dividends) are also taxed between 0 percent and 20 percent, called double taxation. Despite this double taxation, C corporations can write off extensive business-related expenses, like rent, travel costs, and employment benefits. C corporations can also reduce taxes by paying shareholders salaries and limiting dividends.
In addition to having shareholders, a C corp must have corporate directors who are responsible for setting high-level business policies, overseeing corporate management, and making major business decisions. Corporations are also required to have three officers: a President, Treasurer, and Secretary. Officers handle the day-to-day operations of a corporation, including executing policies and participating in other C corp requirements such as recorded meetings.
Who C Corporations Are Right For
A C corporation structure is only for large companies or those that expect to scale, take investments, go public, or have foreign shareholders. If you operate a smaller company, you may be better served by forming an LLC or an S corp. Define your business needs before deciding whether a C corporation is right for your business.
Specific businesses that C corporations are right for include:
- Larger businesses – 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 U.S. 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 later investors.
- Businesses going public – The majority of publicly traded corporations are C corporations because the structure doesn’t limit how many shareholders a corporation can have. Additionally, C corporations can issue common stock with lesser voting rights than other shareholders. If you plan to go public, organize as a C corporation to avoid restrictions on ownership.
- 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.
If you need help deciding which business structure is right for you, check out our comparison guide to LLCs, C Corps, and S Corps or our guide to business partnerships. If you’re a small business, chances are a C corp isn’t right for you, and an LLC or S Corp might be.
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 and, due to the complexities of incorporating, you may need to hire an attorney for $100/hour to $500/hour. Overall, plan to spend $50 to $5,000-plus to form your C corporation.
Costs associated with forming a C corp include:
- State filing fees: $50 – $500
- Attorney fees: $500 – $5,000
Between filing, attorney, and tax preparation fees, the cost of forming a C corp can be very high. If you want help incorporating but need to reduce startup costs, sign up for Rocket Lawyer for $39.99/month. They’ll provide template documents, document review, and attorney consultations to help incorporate.
Which Legal Service is Right for You?
How to Set Up a C Corporation
Setting up a C corporation is complex and requires state-specific articles of incorporation and a federal EIN. C corporations are heavily regulated, so familiarize yourself with your Secretary of State’s requirements before incorporating. Because C corp filings are nuanced, it’s typical for business owners to hire an attorney or use a legal service like Rocket Lawyer.
The five steps needed to set up a C corporation include:
1. Choose Your Business Name
The first step toward forming a C corporation is choosing a name and confirming its availability in your state. Determine your name’s availability by checking your Secretary of State’s website. Some states allow businesses to reserve a name before filing, so take this step if you’ve chosen a name but haven’t completed your filing materials.
Check out our guide to naming your business for a list of tips and common pitfalls when choosing a business name.
2. Determine Your Leadership Structure
Corporate directors are responsible for setting high-level business policies, overseeing corporate management, and making major business decisions. State requirements differ, but all corporations are required to have at least one director. Corporate directors have a duty to protect the interests of shareholders, so choose directors with a comprehensive understanding of the corporation’s goals and purpose.
Corporations are also required to have three officers: a President, Treasurer, and Secretary. Officers handle the day-to-day operations of a corporation, including executing policies, reporting to the Board of Directors, overseeing corporate finances, and record keeping. As with directors, the requirements for officers differ between states, so consult your Secretary of State’s office to determine your needs.
3. Draft & File Articles of Incorporation
Articles of incorporation are the formal documents a business must file to become a corporation. The information included in these documents varies by state. However, if drafted correctly, your articles will likely include the name of your corporation, the name of your registered agent, and the number of ownership shares the corporation is authorized to issue.
File your articles of incorporation with your Secretary of State and review their website for specific content and formatting requirements. In general, state filing fees cost between $50 and $500. You can file your own articles of incorporation through your Secretary of State’s website, but we recommend hiring an attorney or using a service like Rocket Lawyer to draft documents and guide you through the filing process.
4. Apply for Tax Identification Numbers & Business Licenses
Before hiring employees and engaging in business, your corporation must apply for federal, state, and local tax identification numbers and business licenses. File for an Employer Identification Number (EIN) from the IRS and meet state-specific licensing and tax requirements before you begin operations. Contact your state and local governments to determine what you’ll need to operate.
An EIN is a number the IRS uses to identify your business for tax purposes and is required to hire employees. File Form SS-4 to obtain an EIN from the IRS. Also apply for identification numbers required by state and local governments for unemployment, disability, and other state taxes. Contact your Secretary of State’s Office to identify state-specific IDs.
Businesses that engage in certain activities, like spas, liquor stores, and restaurants, require extensive licenses from state and local governments. Familiarize yourself with the types of licenses your corporation will require to operate before engaging in business activities. Visit your Secretary of State’s website to learn more about these requirements.
5. Establish Record-Keeping Procedures
C corporations are required to keep detailed records of corporate finances, shareholder meetings, management decisions, and more. Record-keeping requirements vary by state, but you should keep your financial records for at least six years in case of an IRS audit. Establish record-keeping practices for your company early on to ensure you’re meeting state and federal requirements.
The procedural requirements for a C corp include:
- Organizational documents: Keep a copy of your Articles of Incorporation and any amendments you filed with the state. Also, retain a copy of corporate bylaws describing how the business should operate.
- Ownership documents: Retain a list of the names and addresses of all of your corporation’s shareholders, including the number and class of shares.
- Capital contribution documents: The capital contributions of your initial owners should be included in your Articles of Incorporation. However, keep a separate record of each contribution, especially those made after the filing of your organizational documents. Also, retain records of each owner’s current capital account.
- Meeting minutes: Maintain a record of any actions taken by the corporation that are outside of normal business activities. This includes decisions made during meetings of shareholders and the Board of Directors. Examples of activities that require record include the purchase of real estate or a vehicle.
- Records of actions taken / Tax and financial records: Keep a record of books, annual reports, tax returns, and any other financial documents produced by or for the corporation. The IRS requires most businesses to retain financial records for at least three years in case of an audit, but keep your financials for six years or longer if your corporate structure is complex.
- Miscellaneous: Depending on the type of business you have, the state or federal government may require you to keep records of things like shipping manifests, hazardous material certificates of registration, etc.
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 in personal tax returns. This tax structure can lead to high tax bills for shareholders, but you can reduce your tax liability by keeping as much money in the corporation as possible.
Breakdown of C Corp Taxes
|Corporate Tax Rate|
|Dividend Tax Rate|
How to Reduce Corporate Taxes
Ways to avoid or reduce double taxation of your C corporation include:
- 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 the profits of your corporation are largely related to operations, pay your shareholders a salary instead of dividends. This prevents your corporation’s profits 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 rest for operating of the corporation. This 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 expenses like rental costs, utilities, travel expenses, and other overhead costs associated with running the corporation. Include these expenses in lines 12 through 29 of your corporate tax return.
Always consult an attorney or tax professional when making decisions about your C corporation’s taxes and financial structure. However, if you can’t afford to pay hourly legal fees, use Rocket Lawyer’s. on-call attorney service to help set up your C 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 or where the corporation behaves recklessly or fraudulently. Then, third parties can hold shareholders personally liable for corporate obligations by going after their homes and other assets. Make sure owners aren’t personally operating the business and follow legal formalities like taking meeting minutes to retain liability protection for shareholders.
C Corporation Shareholders
Shareholders are a corporation’s owners. C corporations offer businesses flexibility by enabling them to issue both common and preferred stock with different rights to voting and dividends. Organize as a C corporation if you want to give some shareholders, like founders, greater voting power than others and retain more control over when dividends are paid to common and preferred shareholders.
The specific rights of common stockholders can vary depending on the company, but 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. 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, Inc., has Class A common shares, which are available through the New York Stock Exchange and are entitled to one vote per share, and 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 and protects officers and the Board of Directors from investors.
Preferred stock is stock that 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. Issue preferred stock so you can defer payments in times of reduced cash flow or issue convertible preferred stock to retain the flexibility to convert preferred stock into common stock later.
Issuing preferred stock is a great 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 the case of a bankruptcy. Instead of having voting rights in the corporation, preferred stockholders benefit from the peace of mind that comes from getting paid first.
C Corp Management Structure
Unlike LLCs, C corporations must have officers who handle day-to-day operations. The common 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, and this information should be included in your Articles of Incorporation.
Required C corporation managers include:
A C corporation’s president is generally charged with the overall day-to-day operations of the business. The president can be a member of the Board of Directors but does not have to be. Your corporation’s president will sign important documents like contracts and legal documents, meet with other officers to ensure the goals of the corporation are met, handle high-level employment matters like hiring and firing, and more.
A vice president handles day-to-day operations when the president is unavailable. When not handling the president’s duties, a vice president is responsible for meeting specific duties assigned by the Board of Directors. In larger corporations, there will be several vice presidents who are each responsible for limited areas of the business like sales or marketing.
Every corporation must have a treasurer or chief financial officer to manage the business’ financial matters. Generally, treasurer responsibilities range from oversight to the preparation of financial reports, but the role differs depending on the size and complexity of your business. Regardless, your treasurer should have a comprehensive understanding of your business’ financials and the materials necessary to meet state record-keeping requirements.
Secretaries maintain the documents necessary to meet state-specific record-keeping requirements. These requirements include maintaining a record of the corporation’s actions and recording and maintaining minutes of Board of Directors and shareholder meetings. C corporations are also required to provide shareholders access to certain corporate records, and your secretary may handle such requests.
Advantages & Disadvantages of a C Corporation
C corporations offer appealing 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. Familiarize yourself with the advantages and disadvantages of a C corporation before choosing the structure for your business.
C Corporation Advantages
The advantages of a C corporation include:
- Limited liability: Generally, corporate shareholders are not personally liable for the debts, liabilities, and obligations of the C corporation.
- No limit on shareholders: C corporations are not limited to 100 shareholders like S corps, so C corps are a great 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 limit shareholders to U.S. 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
The disadvantages of a C corporation include:
- 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 Examples
Though only about six percent of U.S. companies are C corporations, these companies account for nearly half of the country’s business income. Because C corporations enable a business to have an unlimited number of shareholders, most publicly traded companies are C corporations. Examples of C corporations include Bank of America, MetLife, and more.
Alternatives to C Corporations
Because of double taxation, record-keeping requirements, and other limitations, the C corporation structure isn’t appropriate for every business. 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 another business structure like an LLC or S corporation.
Business Structures & Who They’re Best For
|C Corporation||Larger businesses that plan to expand beyond 100 shareholders or go public, and that want greater flexibility for voting, dividends, and shareholder and investor type.|
|S Corporation||Small businesses that want to avoid the double taxation of C corporations but don’t plan to grow beyond 100 shareholders or accept outside investments.|
|Limited Liability Company||Companies that want to simplify state administration requirements, maintain liability protection for owners, and easily divide profits and responsibilities among members.|
|Partnership||Business owners who don’t want the hassle of complex state filing requirements and don’t wish to protect owners from the liabilities of the business.|
S corporations are businesses wherein individual shareholders, rather than the corporation, are taxed on corporate income, losses, deductions, and credits. S corporations avoid double taxation, but lack the flexibility of a C corp because they’re limited to up to 100 shareholders, can only issue one class of stock, and may not have foreign shareholders.
Organize as an S corporation if you’re a small, domestic corporation that doesn’t plan to increase its number of owners, accept venture capital funds, or have foreign investors. If you decide to be taxed as an S corporation, file corporate tax return Form 1120S. Check out our guide to S corp taxation for information on IRS requirements for S corporations.
Limited Liability Company
LLCs offer liability protection to owners while reducing tax liabilities. The filing and record-keeping requirements for LLCs are also less demanding than for corporations, making it cheaper and less complicated to set up an LLC. In addition, LLC owners can write off business expenses like start-up costs, rent, and travel on their personal tax returns.
An LLC is a great option if you want a simple, cost-effective business structure that doesn’t require the regulatory oversight of other business structures. However, businesses intending to seek investments from venture capitalists shouldn’t organize as an LLC because the pass-through tax structure will make it unattractive to investors.
A partnership is the association of two or more people engaged in business activities. Partners are taxed on the partnership’s profits on their individual tax returns and are personally liable for the debts and obligations of the partnership. General partnerships don’t have state filing requirements, but keep a partnership agreement on-file to outline your management structure.
Organize your business as a general partnership if you want a flexible business structure that is inexpensive to organize. However, it’s best to file as an LLC or other structure to ensure your owners are not personally liable for the acts, debts, and obligations of the company. Check out our free partnership agreement template to ensure you’re including the correct business details.
Frequently Asked Questions (FAQs)
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 U.S. citizen shareholders and C corporations can have unlimited domestic and foreign investors. Finally, S corporations are limited to one class of stock whereas 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 and C corps are taxed twice. Organize as an LLC 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 but are advantageous for companies where shareholders receive salaries instead of dividends.
Bottom Line – What Is a C Corporation
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. Organize as a C corp if you have a large company or plan to grow.