C-Corporation FAQs Back to All FAQs

What is a C Corporation?

A C Corporation (C Corp) is a legal structure for a business entity that is taxed separately from its owners. The term "C Corporation" comes from Subchapter C of the Internal Revenue Code, which outlines the federal taxation of these entities. Unlike pass-through entities such as sole proprietorships, partnerships, and S Corporations, C Corporations are subject to double taxation, where both the corporation and its shareholders pay taxes on the same income.

Here are key characteristics of C Corporations:

1. Separate Legal Entity: A C Corporation is a separate legal entity from its owners (shareholders). It can enter into contracts, own property, and conduct business in its own name. The corporation itself is responsible for its debts and liabilities.

2. Limited Liability: Shareholders of a C Corporation enjoy limited liability, meaning that their personal assets are generally protected from the debts and legal obligations of the corporation. This protection is one of the key advantages of the corporate structure.

3. Double Taxation: The major drawback of C Corporations is the concept of double taxation. The corporation is subject to income tax on its profits, and shareholders are taxed on any dividends they receive. This results in income being taxed at both the corporate level and the individual level.

4. Unlimited Number and Types of Shareholders: C Corporations can have an unlimited number of shareholders, and there are no restrictions on the types of entities or individuals who can be shareholders. This flexibility is in contrast to the restrictions imposed on S Corporations.

5. Multiple Classes of Stock: C Corporations can have multiple classes of stock with different rights and preferences. This flexibility allows for various ownership structures and the ability to attract different types of investors.

6. Perpetual Existence: C Corporations have perpetual existence, meaning that the business continues to exist regardless of changes in ownership or the death of individual shareholders. The continuity of the corporation is not affected by changes in the composition of its ownership.

7. Formal Structure and Governance: C Corporations typically have a more formal structure and governance requirements compared to other business entities. They are required to have a board of directors, hold regular shareholder meetings, and maintain corporate records.

8. Preferred for Public Companies: The C Corporation structure is often preferred for companies planning to go public through an initial public offering (IPO) since public investors are more familiar with and accustomed to investing in C Corporations.

9. Flexibility in Employee Benefits: C Corporations can offer a wide range of employee benefits, including health insurance, retirement plans, and stock options. This can be advantageous for attracting and retaining talented employees.

When considering a C Corporation, business owners should carefully weigh the advantages and disadvantages, including the potential tax implications, governance requirements, and their long-term business goals. Consulting with legal and financial professionals is advisable to make informed decisions based on the specific needs and circumstances of the business.

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