What is a C corporation (C corp)?
– A C corporation is a legally separate business entity owned by shareholders. It’s organized under state corporate law, issues stock, and has its own legal and tax identity distinct from its owners. Directors and officers run the company; shareholders are owners but usually do not manage day‑to‑day operations.
How C corporations work (plain language)
– Legal separation: The company’s debts and legal obligations generally do not become personal debts of shareholders, officers, or directors (limited liability).
– Governance: A C corp must follow corporate formalities such as adopting bylaws, holding annual meetings of directors and shareholders, keeping minutes and voting records, and maintaining a shareholder register with names and ownership percentages.
– Capital: Because a C corp can issue stock and have an unlimited number of shareholders, it is well suited to raising large amounts of equity capital and to institutional ownership.
– Taxes: A C corp pays corporate income tax on its profits at the corporate level. If the corporation distributes profits as dividends to shareholders, those dividends are taxed again on shareholders’ personal tax returns. This “double taxation” is a defining tax feature of C corporations.
– Reporting and registration: Corporations often must file annual reports and financial statements; if selling securities or otherwise reaching SEC thresholds, they must register with the Securities and Exchange Commission. Recent changes related to beneficial‑ownership reporting (the Corporate Transparency Act) were introduced in 2021 and, according to the source material, had requirements beginning in 2024 but were reported lifted as of March 2025.
Key advantages
– Limited personal liability for owners, officers, and directors.
– Perpetual existence — the corporation continues when owners change.
– Ability to raise capital by issuing shares and attracting institutional investors.
– Clear separation between ownership and management (useful for larger firms or passive investors).
Key disadvantages
– Corporate-level income tax plus tax on dividends leads to potential double taxation of the same profits.
– More expensive and complex to form and maintain compared with simpler entities (e.g., LLCs); higher legal and administrative compliance costs.
– Shareholders cannot generally deduct corporate losses on their personal returns as S‑corp or LLC owners might.
How a C corporation differs from two common alternatives
– S corporation (S corp): An S corp is a tax designation that typically allows profits and losses to “pass through” to shareholders’ personal returns (no corporate income tax). S corps have ownership limits (generally up to 100 shareholders) and cannot be owned by certain entities. Both S and C corps provide limited liability and similar corporate formalities; the main distinction is tax treatment and shareholder eligibility.
– Limited liability company (LLC): An LLC gives limited liability protection but is usually more flexible in management and tax treatment. By default, LLC income is passed through to members (owners) for tax purposes; an LLC can elect corporate taxation but is often used by smaller operations and sole proprietors seeking simpler administration.
Step-by-step: how to create a C corporation (checklist)
1. Choose a corporate name that complies with your state’s rules.
2. Prepare and file articles of incorporation with the state filing office (Secretary of State).
3. Draft corporate bylaws and keep a copy at the principal place of business.
4. Appoint initial directors and hold an organizing board meeting; record minutes.
5. Issue stock to initial shareholders and record ownership percentages.
6. Obtain an Employer Identification Number (EIN) from the IRS.
7. Complete required state and local registrations and licenses.
8. If planning to sell securities or reach federal thresholds, determine SEC filing needs and register if required.
9. Establish ongoing compliance procedures: annual shareholder/director meetings, minutes, annual reports, and tax filings.
10. Set up corporate bank accounts and accounting systems that separate company finances from personal finances.
Compliance & recordkeeping checklist (what to maintain)
– Corporate bylaws and articles of incorporation (on file).
– Shareholder register with names and ownership percentages.
– Minutes of board and shareholder meetings and voting records.
– Annual reports and required financial statements.
– Federal, state, and local tax filings (including corporate income tax returns).
– Any required securities filings and disclosures.
Worked numeric example: illustrating “double taxation”
Assumptions:
– Pretax corporate profit: $1,000,000
– Corporate tax rate: 21% (corporate tax rate referenced for 2025)
– Corporation distributes remaining after-tax profit as dividends.
– Dividend tax rate for shareholders (qualified dividends assumed): 15% (example rate — actual rates vary by taxpayer)
Calculations:
1. Corporate tax paid = 1,000,000 × 21% = $210,000
2. After-tax corporate
2. After-tax corporate profit = 1,000,000 − 210,000 = $790,000
3. Dividend paid to shareholders = $790,000
4. Dividend tax paid by shareholders = 790,000 × 15% = $118,500
5. Net cash received by shareholders = 790,000 − 118,500 = $671,500
Summary (double taxation illustrated)
– Total taxes paid (corporate + shareholder) = 210,000 + 118,500 = $328,500
– Effective combined tax rate = Total taxes / Pretax profit = 328,500 / 1,000,000 = 32.85%
– Interpretation: the corporation’s profit is taxed first at the corporate level, then the distributed portion is taxed again at the shareholder level — that is the commonly cited “double taxation” of C corporations.
Key assumptions and caveats
– “Qualified dividends” are taxed at preferential rates (example used: 15%). Non‑qualified dividends are taxed as ordinary income at the shareholder’s individual marginal rate, which can be higher.
– State and local taxes are excluded from the example and will increase total tax burden.
– The corporation could retain earnings (not distribute dividends), pay salaries or fringe benefits (deductible to the corporation but taxable to recipients), or use other strategies — each has different tax, legal, and shareholder implications.
– Tax rules and rates change; this example is for illustrative purposes only.
Practical checklist: ways owners commonly address double taxation (high‑level)
– Elect S corporation status (if eligible): avoids corporate-level income tax because profits/losses flow through to owners’ personal returns. Check eligibility and timing rules.
– Pay reasonable salaries to owner-employees: salaries are deductible for the corporation and taxable to recipients; beware payroll taxes and IRS scrutiny on “reasonable” amounts.
– Retain earnings for growth: defers shareholder taxation until distribution, but may create accumulated earnings tax risk if done principally to avoid tax.
– Use tax-advantaged distributions: qualified dividends and long-term capital gains often benefit from lower rates.
– Consider capital structure: debt interest is deductible to the corporation (reducing corporate taxable income) but interest is taxable to the recipient and increases company leverage.
– Consult tax professionals: corporate tax planning involves legal, accounting, and compliance tradeoffs (payroll, state filings, transfer pricing, ATED rules, etc.).
Worked alternative quick example — paying salary instead of dividend (simplified)
Assume the owner is paid $200,000 salary and the company’s pretax profit remains $1,000,000:
– Corporate taxable income after salary = 1,000,000 − 200,000 = $800,000
– Corporate tax (21%) = 800,000 × 21% = $168,000
– Owner pays income tax on $200,000 salary (not shown here — depends on personal bracket and payroll taxes)
– Remaining corporate after-tax = 800,000 − 168,000 = $632,000 (could be retained or distributed later)
This illustrates how compensation shifts taxable income from corporate level to individual level; the overall effect depends on personal tax rates, payroll taxes, and deductibility rules.
Further reading and official references
– Investopedia — C Corporation: https://www.investopedia.com/terms/c/c-corporation.asp
– IRS — C Corporations: https://www.irs.gov/businesses/small-businesses-self-employed/c-corporations
– IRS — Qualified Dividends and Capital Gain Tax Rates: https://www.irs.gov/taxtopics/tc409
– U.S. Securities and Exchange Commission — Corporate Bylaws and Governance: https://www.sec.gov/fast-answers/answers-corpbylawshtm.html
– Tax Foundation — Federal Corporate Income Tax Rate: https://taxfoundation.org/what-is-the-corporate-tax-rate/
Educational disclaimer
This explanation is educational and illustrative only. It is not individualized tax or investment advice. For decisions affecting your tax position or corporate structure, consult a qualified tax advisor or attorney.