What Is a C Corporation?
A C corporation is a business owned by shareholders that is taxed independently from its owners. By definition, a C corporation is a tax status, not a business entity type. In fact, all corporations are, by default, C corporations, unless they do one of two things:
- File Form 2553 with the IRS for S corporation status;
- or file a 501(c) application with the IRS for non-taxable status.
A Delaware C corporation is a separate entity from its shareholders, and therefore C-corps offer limited liability protection to Directors and shareholders. In addition, C-Corps differ from other corporations in taxation and ability to raise investor capital, though they share the same structure as other corporations.
How a C Corporation Works
A C corporation is typically structured around three key groups: shareholders, a board of directors, and corporate officers. Shareholders are the owners of the company and elect the board of directors, which is responsible for overseeing the corporation and making major strategic decisions. The board appoints officers, such as the CEO and CFO, who manage the company’s day-to-day operations.
To maintain its legal status, a C corporation must follow certain corporate formalities. These generally include holding regular shareholder and board meetings, keeping detailed records such as meeting minutes, filing annual reports with the state, and maintaining financial and corporate records separate from those of its owners.
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Ownership in a C corporation is represented by shares of stock. The number of authorized shares is established in the company’s Articles of Incorporation and can be increased later by amendment. Unlike S corporations, C corporations can issue multiple classes of stock, which may carry different voting rights and other privileges. The board of directors typically has the authority to issue shares, subject to the corporation’s governing documents and applicable laws. Companies do not need to issue all authorized shares at once and often reserve shares for future investors, employees, or fundraising rounds.
C corporations generally have no restrictions on the number or type of shareholders, meaning they can have unlimited owners, including foreign investors. However, share transfers may be subject to securities laws and private agreements, especially in closely held companies. If a shareholder also works for the company as an employee, they are treated as an employee for tax purposes and receive wages subject to payroll taxes, rather than being considered self-employed.
C-Corp Taxation
One of the most relevant C-Corp benefits is its taxation. C corporations offer flexibility in planning and strategizing your federal income taxes. In fact, there is much more flexibility than in either partnerships or sole proprietorships.
A Delaware C-Corp can pay for employees' fringe benefits and then deduct these amounts as business expenses. That way, neither the owner nor the employee pays income tax on the value of the fringe benefits received.
For example, a C-Corp can deduct the following employee benefits:
- Health insurance
- Disability insurance
- Group term life insurance
- Reimbursement of employee medical expenses not covered by insurance
A start-up will have to wait until the company earns a profit before taking advantage of these tax benefits. However, in a C corporation, fringe benefits can be deducted as a business expense. The caveat is that the benefits must be provided to an array of employees, not just the C-Corp's owners. In fact, 70% of eligible employees must be able to take advantage of the benefits. The benefits must also be non-discriminatory, i.e., not designed solely to benefit the owners.
In addition, as long as the owners pay themselves reasonable salaries, their salaries can be deducted from the C-Corp's profits, thus lowering the amount of corporate tax owed. First, the C-Corp deducts all business expenses, including but not limited to the cost of goods, salaries, fringe benefits, interest payments, and improvements. By this method, a C-Corp’s profits are balanced out by the owners' compensation, so there is little taxable income left on which the corporation must pay taxes.
Double Taxation
However, shareholders of a C-Corp may face double taxation. When the company pays taxes on its profits via Form 1120, and if profits are distributed to shareholders in the form of dividends, those shareholders must pay taxes on the dividends.
A number of C-Corps don’t pay any corporate taxes because the owners are also employees, so their salaries and bonuses (any type of compensation) can be deducted as a business expense. Thus, one way to avoid double taxation is to pay the owners higher salaries instead of distributing dividends, but the individual’s income tax on a salary is taxed at a higher rate than dividend distributions.
A C corporation is permitted to retain earnings to improve the company if it complies with the appropriate tax provisions.
C-Corp taxes are low from retained earnings; this is unique to C Corps, and they also tend to carry a lower risk of an IRS audit than a sole proprietorship or LLC.
Forming a C Corporation
The easiest way to form a C Corporation in Delaware (or any other state) is work alongside Harvard Business Services. Inc. Through our online portal, you can form a C-Corp in just a few simple steps. Once you’ve chosen a company name and designated us as your registered agent, our team will gather any additional information before filing the necessary documentation on your behalf.
To learn more about Forming a Corporation in Delaware, be sure to check out our article.
Ongoing C Corporation Compliance
C-Corps need to keep up with several compliance requirements. As previously mentioned, a Delaware C corporation needs to hold regular meetings for the board of directors and shareholders, where they will maintain detailed records of the discussion topics. These meetings are held to ensure that shareholders have a formal setting for voting on significant decisions. C-Corps will also need to file an Annual Franchise Tax Report and pay their state franchise taxes by March 1st of each year.
C Corp vs S Corp
By default, a corporation is taxed as a C corporation. However, eligible corporations can elect S corporation status by filing Form 2553 with the IRS. The key difference lies in how each entity is taxed. A C corporation pays taxes at the corporate level, and shareholders may also pay taxes on dividends. In contrast, an S corporation is a pass-through entity, meaning profits and losses are reported on the shareholders’ personal tax returns, avoiding corporate-level income tax.
However, S corporations come with several restrictions. They are generally limited to 100 shareholders, must be owned by U.S. individuals (with some exceptions), and can issue only one class of stock. These limitations can make it more difficult to raise capital or bring on certain types of investors.
Because of this, businesses that plan to scale significantly or seek outside investment often choose a C corporation structure, while smaller businesses may prefer the simplicity of S corporation taxation.
C Corp vs LLC
A limited liability company (LLC) combines elements of both corporations and partnerships. By default, an LLC is treated as a pass-through entity for tax purposes, meaning profits and losses are reported on the owners’ personal tax returns. In contrast, a C corporation is taxed separately from its owners, which can result in double taxation if profits are distributed as dividends.
One of the main differences between C corporations and LLCs is structure and formality. C corporations are required to follow stricter governance rules, including appointing a board of directors, holding regular meetings, and maintaining detailed corporate records. LLCs, on the other hand, generally have fewer formal requirements and can be managed directly by their owners.
There are also differences in fundraising. While LLCs offer flexibility in how profits are distributed among members, they may face limitations when it comes to raising capital. C corporations can issue multiple classes of stock and have an unlimited number of shareholders, which makes them more attractive for businesses seeking outside investment or planning to scale.
Because of these differences, LLCs are often preferred by small business owners looking for simplicity and tax flexibility, while C corporations are more commonly used by companies with plans for rapid growth or going public.
Which Entity to Form
Choosing between a C corporation, S corporation, and LLC should ultimately come down to how you plan to grow the business.
- C Corporations are best suited for businesses planning to raise capital or go public. C corps allow unlimited shareholders and multiple classes of stock, making them attractive to investors. However, they are subject to corporate taxation and potential double taxation on dividends.
- S Corporations are generally ideal for small to mid-sized businesses that want pass-through taxation while maintaining a corporate structure. S corps avoid double taxation, but they have other restrictions, such as a 100-shareholder limit, U.S.-only ownership, and only one class of stock.
- LLCs generally offer the most flexibility and simplicity. LLCs provide pass-through taxation by default and come with fewer formalities. However, they may be less attractive to investors and harder to scale compared to C corporations.
Advantages of a C Corporation
Now that we’ve taken a closer look at what makes a C Corp unique, let’s review some of the more prominent benefits of forming this type of company:
- Tax Deductions (Ask an Accountant)
- Capital Raising Opportunities
- Stock Flexibility
- Easy Transfer of Ownership
- Perpetual Existence
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C-Corp FAQs
For C corporations, the due date for the Delaware Franchise Tax is on or before March 1st each year. All Delaware Corporations must pay the annual Franchise Tax regardless of their incorporation date and company activity.
Yes. A C corporation can own an LLC. This allows the C Corp and the LLC to operate as separate legal entities, which offers liability protection to the parent company. In general, a C corporation has no limits to its ownership, but an S corporation does. A C-Corp can own and be owned by other C-Corps, but C Corporations cannot own S corporations. This is generally due to an S-Corp's eligibility for favorable tax treatment as a pass-through entity.
Yes. This process involves approving the conversion under the LLC’s operating agreement, then filing a Certificate of Conversion and a Certificate of Incorporation with the Delaware Division of Corporations. The new corporation will adopt bylaws, appoint directors, and issue stock. Because the process can have tax consequences, it’s advisable to consult a legal or tax professional beforehand.
No. Double taxation only occurs when the corporation earns a profit and pays corporate income tax and those profits are distributed to shareholders as dividends. If profits are retained in the business rather than distributed, shareholders are not taxed on them, so only the corporate tax applies.
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