What is a C corporation?
A C corporation is a type of company that is owned by shareholders. The shareholders elect a board of directors, who decide how the company runs. In a legal sense, corporations are separate entities that can sue and be sued. That means legal and financial liability lands on the shoulders of the corporation, not the business owners.
The Internal Revenue Service (IRS) and other tax authorities consider corporations to be separate taxpayers. C corps pay tax at a special corporate tax rate different from, and often lower than, individual tax rates.
C corporations are divided into publicly held and privately held companies. Publicly held companies sell shares to the general public—they’re required to disclose financial information. Privately held companies are not.
Shareholders are responsible for electing a board of directors, which then appoints management to run the company day-to-day. In smaller corporations, members of the board are also members of management.
The difference between a C corporation and an S corporation
A C corporation reports its own earnings and losses on its tax return, and gets taxed. But with S corporation status, those earnings and losses are passed on to the owners, who report them on their own returns. C corps and limited liability companies (LLCs) have the option of electing a subchapter S corporation status on their income tax returns.
Further reading: S Corp vs. C Corp
Benefits of forming a C corporation
Some of the more popular reasons small businesses in the United States form C corporations are extra legal protection and for tax advantages. Here’s a closer look at the benefits.
Ability to raise capital
C corps can get money—or “capital”—by selling shares of stock. The key is to convince investors that your company will be profitable in the future, and the value of shares will rise. This is especially helpful if you have a great idea for a business, but don’t have the cash to get it off the ground.
A lot of entrepreneurs choose to form a C corporation because it protects them. When you own a sole proprietorship, your money and the company’s money are one and the same. If your business runs out of money, so do you. If the business gets sued, you get sued as well. But a C corp has separate legal and financial status. If bad things happen to your business, the corporation’s money is on the line. Your personal assets are safe.
Long life expectancy
Since C corporations exist as separate legal entities, they don’t automatically dissolve when an owner leaves. For instance, say you and a business partner share ownership in a C corp. One day, your partner decides to leave the business. They can sell off their shares, and the company keeps running. In the same situation, a different business entity—like an LLC—would dissolve. But a C corp can roll with the punches.
Disadvantages of forming a C corporation
Although the C corporation business structure is ideal for many businesses, it does come with a few drawbacks.
It’s expensive to incorporate
Compared to other business structures, it’s expensive to start and run a C corporation. Depending on how the company is set up, it could potentially cost thousands of dollars to get a certificate of incorporation. That’s in addition to the ongoing fees required to maintain it. Those ongoing fees are necessary for maintaining good business standing, and they vary state by state.
Increased regulations and paperwork
C corps have to follow a lot of regulations at the federal, state, and local levels. That means plenty of paperwork, and more time and money devoted to keeping track of tax, business, and financial records, drafting corporate bylaws, issuing annual reports, and electing a board of directors.
The downside of C corporations existing as separate tax entities is that they are subject to tax at both the personal and corporate level (double taxation). After a company’s profits are taxed as corporate income, they’re paid out to shareholders. The shareholders are required to report the amount they received on their personal income tax returns, and pay taxes on it.
C corporation benefits and drawbacks
|Ability to raise capital
The C corp structure makes it easier to bring on investors.
|Cost of incorporation
C corps incur business expenses upfront in order to be formed, and ongoing fees to maintain.
Shareholders are protected from personal liability thanks to the corporate business structure.
C corps have to conform to a lot of regulations, which means more paperwork and recordkeeping.
|Long life expectancy
Unlike other business structures, C corps don’t dissolve when owners leave the business.
C corps are taxed individually, and then profits dispensed to shareholders are taxed on their personal tax returns.
How to form a C corporation
Here are the steps you’ll need to take in order to form a C corporation:
Choose an available business name that follows corporate naming rules set out by your state
Appoint the directors of the C corporation
Issue stock to the initial shareholders of the C corporation
Obtain the necessary licenses and permits for your business
Still not sure whether C corporation status is right for your business? Learn how to choose a business entity type.