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What is a C Corporation?

Glossary definition

What is a C Corporation?

A C Corporation is a legal definition stating how a corporation is taxed. Its name comes from the fact it’s defined in subchapter C of the first chapter within the Internal Revenue Code.

We tend to use the word corporation freely when describing businesses but it has a precise meaning: An independent legal entity owned by its shareholders. A corporation will remain in existence even if the shareholders change, something that might not be true of a sole proprietorship or partnership, which are some other legally-defined types of business.

So, what then is a C Corporation? It’s the most popular type of corporation but it’s also simply a tax definition: A C Corporation is one that pays tax that is calculated based on its income. This is in contrast to the other type of corporation: S Corporation, which is a pass-through business (also referred to as flow-through) in that it passes both income and losses straight through to the shareholders for them to handle tax.

Both a C Corporation and S Corporation have limited liability, which is to say, shareholders are only involved up to the value of their investment and they’re not liable for the company’s debts. Should a C Corporation go bankrupt, its investors will lose their investment but they will not be personally liable for its debts.

Following the Tax Cuts and Jobs Act (2017), all C Corporations regardless of their size pay a flat tax rate of 21%. Previously the tax rate varied depending on taxable income.

Because a C Corporation is the de facto standard type of corporation, nothing needs to be done to create one other than the usual steps of creating articles of incorporation in order to form a corporation within your state (or the District of Columbia).

Whether to use a C Corporation for your business requires legal and accounting advice, and will vary depending on the nature and also ownership of your business. A sole proprietorship, partnership or limited liability company (LLC) may make more sense, and if a business is family-owned then an S Corporation is often recommended.

The typical issue cited with a C Corporation is double taxation—the business will pay tax, and investors pay the tax again on their dividend. Because an S Corporation passes tax concerns for profit and loss to the shareholders this can be avoided—but an S Corporation has its own limitations, such as a maximum of 100 shareholders and only one class of stock.

Other issues often cited for smaller businesses to not form a C Corporation, compared to something like a sole proprietorship, partnerships or LLC, is that it’s simply a more complex thing. A C Corporation has more paperwork requirements and will require more staff time attending to its needs, which can adversely affect younger businesses where staff will very likely to be focusing almost on growth. Additionally, compared to other legal entities used for business a C Corporation can be more expensive to setup—although conversely is essentially a requirement if you want to raise further money via venture capital investment, for example, or create an initial public offering (IPO).

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