C-Corporation

A C-Corporation (C-Corp) is the standard legal structure for a corporation where the business is treated as a separate entity from its owners. It pays its own corporate taxes on earnings, and if profits are distributed to shareholders through dividends, those dividends are taxed again on the shareholders' income, leading to "double taxation." C-Corps are common for larger companies and those planning to raise significant funds from investors.

A C-Corp is a popular business structure for companies seeking to raise capital, protect shareholders' assets, and establish a formal corporate framework. While the double taxation issue is a drawback, the ability to attract investors, issue stock, and limit liability often outweighs this for larger businesses and startups looking to grow rapidly.

• Separation of Owners and Company: A C-Corp is a legal business structure that exists separately from its owners (as opposed to an entity like a sole proprietorship).
• Double Taxation: C-Corps are subject to corporate income tax at the company level, and dividends are taxed again at the shareholder level.
• Limited Liability Protection: Shareholders' personal assets are protected from business debts and liabilities.
• No Shareholder Limits: C-Corps can have unlimited shareholders, making them ideal for companies that want to go public or raise substantial funds through investors. It's a standard structure for large companies and startups aiming for rapid growth.

A C-Corporation is one of the most common and well-known types of business entities. It is considered a separate legal entity from its owners (aka shareholders), meaning the corporation can enter into contracts, incur debt, sue, and be sued—all independently of the people who own it. C-Corps are taxed at the corporate level, and their shareholders are taxed again on dividends they receive.

Businesses opt for C-Corp status (as opposed to S-Corporation or LLC status) to access a wider range of capital opportunities, limit shareholders' personal liability, and establish a formalized structure for company governance and management.

How Does a C-Corp Work?

A C-Corp is formed by filing Articles of Incorporation with the state where the business is based or doing business (check out our Startup Costs for specifics on your state). Once established, the C-Corporation operates as its own legal entity, meaning it can engage in business activities separate from its owners.

Unlike pass-through entities like LLCs or S-Corporations, the company pays corporate income taxes on its profits. If the corporation distributes any of those profits to shareholders as dividends, they must report the dividends as income on their personal tax returns, again paying taxes on that money. This is known as double taxation—once at the corporate level and again at the individual level.

Despite double taxation, many large companies choose the C-Corp structure because of its advantages in terms of fundraising, liability protection, and growth potential.

Advantages of a C-Corp

1. Limited Liability Protection: Shareholders of a C-Corp are not personally liable for the business's debts or legal obligations. Their assets, like homes or savings accounts, are protected if the corporation faces financial trouble or legal action.
2. Unlimited Shareholders: Unlike S-Corporations, which are limited to 100 shareholders, C-Corporations can have unlimited shareholders. This makes the C-Corp structure ideal for companies that want to issue stocks to raise capital or plan to go public.
3. Ease of Raising Capital: C-Corporations can issue multiple classes of stock, and investors prefer C-Corps because of their flexible stock options and straightforward corporate structure. This makes attracting outside investment from venture capitalists or institutional investors easier.
4. Perpetual Existence: A C-Corporation continues to exist even if the original owners or shareholders leave, die, or sell their shares. This perpetual existence provides stability and makes C-Corps attractive to long-term investors.
5. Deductions and Benefits: C-Corporations can deduct a wide range of business expenses, including salaries, bonuses, health insurance benefits, and even employee retirement contributions (starting on page 9). This means the company can reduce its total taxable income.
6. Credibility: Being structured as a C-Corp gives a company an air of legitimacy and professionalism. It's the standard structure for large, established businesses, and investors are familiar with it.

Disadvantages of a C-Corp

1. Double Taxation: The most significant disadvantage of a C-Corp is the double taxation issue. First, the corporation pays taxes on its profits. Then, if those profits are distributed to shareholders as dividends, shareholders must pay personal income taxes on the money they receive.
2. Complexity and Cost: C-Corps require more administrative work than other business structures, like LLCs or partnerships. This includes adhering to corporate formalities, such as holding annual meetings, keeping minutes, issuing stock, and maintaining a board of directors. Filing taxes is also more complicated, often requiring the help of tax professionals.
3. Limited Control for Shareholders: In large C-Corporations with many shareholders, individual owners often have little say in the day-to-day operations. Most decisions are made by the board of directors, company officers, or C-suite.
4. Potential for High Corporate Tax Rates: C-Corps are taxed at the federal corporate tax rate, which can be higher than individual tax rates. Even though the Tax Cuts and Jobs Act set the corporate tax rate to a flat 21%, this is still a consideration compared to tax rates for other business entities.

Formation and Structure of a C-Corp

A C-Corporation is formed by filing the Articles of Incorporation with the state and paying the required filing fees. Once formed, the corporation must follow specific rules and regulations to maintain its status. These include:

• Appointing a Board of Directors: A board of directors oversees the company's operations and makes high-level decisions.
• Issuing Stock: C-Corporations must issue stock to shareholders, representing ownership in the company.
• Holding Regular Meetings: C-Corporations must hold annual meetings for shareholders and directors, where major business decisions are discussed and voted on.
• Keeping Corporate Records: The corporation must keep detailed records of its financial activities, meeting minutes, and any changes to its corporate structure.

Variations of Corporations

• Nonprofit Corporations: Not-for-profit corporations are established to serve a public or social cause rather than to make a profit for their owners or stakeholders.
• Closed Corporations: Private or closed corporations are companies with a small number of private shareholders who are closely associated with the business, such as managers, owners, and even families.
• Public Corporations: Unlike closed corporations, public corporations are comprised of publicly available shares and are regulated by the SEC (U.S. Securities and Exchange Commission).
• Benefit Corporations: B-Corps are for-profit companies that have received certification from B Lab, a nonprofit organization that certifies businesses that meet certain social and environmental standards.
• S-Corporations: S-Corp is a tax designation that passes corporation income, losses, deductions, and credits directly to its shareholders for federal tax purposes, allowing the business to avoid double taxation found in traditional C-Corp status. However, it is often found used in combination with C-Corp in business vernacular.
• Professional Corporations: PCs are a type of corporation formed by licensed professionals—like doctors, lawyers, accountants, and architects—who offer specialized services.

Who Should Form a C-Corp?

A C-Corp designation is ideal for businesses that:

• Plan to raise significant outside investment.
• Intend to go public (be traded on the market) or issue shares of stock.
• Want to protect shareholders from personal liability.
• Require a more formal structure and have the resources to handle administrative tasks.

Startups looking for venture capital, companies planning for rapid growth, or businesses in industries like technology, pharmaceuticals, and manufacturing often choose the C-Corp structure due to its flexibility in raising capital and liability protection.

Popular Corporation States

While corporations may be formed in all 50 states, some states have more favorable conditions:

• Delaware: Over 60% of Fortune 500 companies are incorporated in Delaware. Many businesses of all sizes choose to initially form in Delaware to gain all their business advantages, like preferential taxes and legal systems.
• Nevada: Nevada's conservative, business-friendly environment and lack of income tax have influenced the increasing popularity of corporate establishments in the state.

Check out our top five favorite states to start a business in, from corporations to beyond.