What is a C corp?

When starting your own business, the way your business is classified affects your tax and legal obligations. There are three main incorporation options: forming an LLC, an S corp or a C corp.

A C corp is a business structure that is completely separate from its owners and managers. This means a corporation can act on its own by opting into a contract, suing or being sued and incurring and paying debts. However, it also means that it is taxed as a separate entity from its owners. Due to this separation, its owners are also taxed on earnings they derive from the corporation. This means double taxation on profits at the corporate and shareholder levels.

Shareholders are owners of the company and receive stock as proof of their ownership. They are the investors in the company, offering funds and assets to make it operational and keep it running. Owners are given limited liability protection, meaning their personal assets or funds cannot be seized to pay corporate debt or liability.

Belinda Rosenblum, CPA of Own Your Money, Inc. said of a C corp structure: “It is a good vehicle for attracting venture capital and other types of equity financing as it is widely accepted and understood by investors.”

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C corp advantages and disadvantages

There are a lot of advantages to owning a C corp. While there aren’t as many disadvantages, the ones that do exist can have a big impact, so they’re important to consider. Here are some of the biggest pros and cons of starting a C corp.

PROS

CONS

Attracts investors that other business types may not, including LLCs, such as foreign and venture capital investors and investors who can only invest in C corporations. Can have an unlimited number and type of shareholders, making raising capital easier than with other business structures. Can offer more than one class of stock, unlike an S corp. Owners enjoy limited liability protection. Owners can choose the company’s fiscal year end. The company exists in perpetuity, meaning if a member dies or leaves, the company remains intact (unlike in an LLC). Members can freely sell their ownership (shares) (unlike in an LLC). The owner can deduct health insurance premiums to lower their tax burden. Out-of-pocket healthcare costs and some fringe benefits can be deducted, too.

Double taxation of corporate profits. Higher paperwork burden. Stricter managerial rules, such as the requirement to have a board of directors. Shareholder and director meetings are required with proper prior notification and recorded meeting minutes. If your income isn’t high enough to justify the extra tax burden, it may make more sense to choose a lower-maintenance pass-through entity setup, like an LLC or S corp.

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C corp advantages

C corps can be more favorable than other business designations to attract investors, as the rules are more forgiving than those of an LLC or S corp. Not only can you have an unlimited number of investors, but you can also include foreign investors and offer more than one class of stock. In addition, some venture capitalists can only invest in C corporations, giving this designation a particular advantage if the business wants to raise capital quickly.

Since a C corporation exists in perpetuity, separate from its owners and managers, the business can continue to operate if any key managers or owners leave. In contrast, if an LLC owner passes away, the LLC must often be dissolved. This also means that owners can freely sell or trade their shares to meet their own goals without impacting other shareholders or the business’s integrity. 

Overall, C corps can be good for individual business owners with a high healthcare spend, as this business structure allows easier deductions for health insurance premiums and out-of-pocket costs the owner may incur. The designation also allows you to deduct fringe benefits, like long-term care insurance premiums. 

“Another advantage of C corps is the ability to pick a fiscal year end,” says Rob Seltzer, CPA and member of CalCPA. “This enables owners to take advantage of paying salaries in two different years. This aspect is particularly advantageous when rates change.”

C corp disadvantages

When running a C corp, you should expect to deal with a more extensive paperwork and administrative burden than if you were running an LLC or S corp, and there will be more legal regulation over your business. This means the cost of running your business is likely to be higher. For example, you must maintain a board of directors, regularly hold shareholder and director meetings, properly notify attendees of upcoming meetings and keep meeting minutes. 

In addition, perhaps the largest negative of C corps is the prospect of double taxation. When the Tax Cuts and Jobs Act was passed in 2017, it lowered the corporate tax rate from its max of 35% down to a flat rate of 21%. If you’re in the highest income tax bracket of 37%, creating a C corp could potentially save you significant money on taxes. 

“It’s important to note, however, that C corps can be subject to double taxation,” says Kimberly Tara, CPA, CTC of The Tara CPA Firm. “Double taxation means that the business pays taxes on its income and then the shareholder also pays taxes on the dividends distributed from the corporation — and this could wind up being higher than 37% in total.”

How to form a C corp 

C corps are established at the state level, meaning that the process for setting up a C corp varies slightly depending on where you operate. However, the basic process includes 11 steps: 

1. Choose a business name and ensure it’s available with the state and not protected from national infringement. 
2. Designate a registered agent.
3. File articles of incorporation with the state.
4. Get a federal employer identification number (EIN). 
5. Create corporate bylaws and, as you do, choose officers and directors.
6. Apply for any licenses or permits applicable to your business. 
7. Obtain a state tax ID number or ID numbers for applicable state tax accounts.
8. Enroll in your state’s workers’ compensation program.
9. Issue stock certificates to investors and owners.
10. Hold an initial shareholder and director meeting. 
11. File annual reports with the state.

C corp vs. S corp 

Whether you use an S corp or C corp depends entirely on your situation and business goals.

A C CORP MAY BE BEST FOR YOU IF…	AN S CORP MAY BE BEST FOR YOU IF…
You want to attract a wide range or large number of investors. You want to operate internationally. You want the business to live on even if key members or owners leave. You want to issue multiple types of stock.	You want to save on distribution taxes. You want to avoid double taxation. You would like to pay a lower tax rate for profits above a reasonable salary. You want to begin issuing stock.

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When a C corp may be best for you

One of the biggest advantages of a C corp over an S corp is more relaxed rules for attracting investors. S corps have the following limitations: 

• S corps must have no more than 100 investors.
• All shareholders must be U.S. citizens.
• You can only offer one type of stock.
• All shareholders must be either an individual, estate, trust or exempt organization.

C corps are not held subject to the same rules. There is no cap on the number of investors, and foreign investors are permitted. Besides that, you’re not limited to just one type of stock. This affords businesses the opportunities they need to grow quickly and even internationally if they so choose, making a C corporation an ideal election for companies poised for growth.

When an S corp may be best for you

An S corp offers shareholders some tax benefits. Namely, whatever amount the shareholder invested into the business can be returned to them tax-free as distributions. Second, an S corporation is a pass-through entity, meaning all profits and losses are passed through to shareholders and are not taxed at the corporate level, only at the shareholder level. This means a lower amount of taxes paid on profits overall because the double taxation of a C corporation does not occur. 

Moreover, while a C corporation can have an unlimited number of shareholders, an S corporation can only have 100 investors. So, for companies that have fewer shareholders but want a business structure in which they can raise funds by issuing stock, an S corporation structure may be a good election. With this structure, companies can avoid the double taxation of a C corporation while still enjoying the ability to raise capital through stock issuance. 

C corp vs. LLC

Most people don’t consider either an LLC or a C corp held up against each other. As businesses grow, they tend to move from an LLC to an S corp. The next step would be a C corp.

“A business owner would consider adding an S corp election as profits grow past $40,000 to $60,000, so that the tax savings of the S corp election exceeds the increased complexity of a separate S corporation return and processing of payroll,” says Rosenblum. 

“A C corp would be considered once the business becomes [an even] larger business that anticipates eventually going public, adding additional outside investment or being acquired.”

That said, if you’re trying to decide between the two, here are important considerations.

A C CORP MAY BE BEST FOR YOU IF…	AN LLC MAY BE BEST FOR YOU IF…
You want increased liability protection and more legal space between your personal finances and the business’s finances. Your business is generating high revenue which would make the corporate tax rate more favorable than the personal income tax rate. You want to attract investors or launch an initial public offering (IPO) to seek more funding.	Your business revenue is in the neighborhood of $40,000 to $60,000 or less. You want more flexibility with your allocation of profits and losses. You want less paperwork burden and legal oversight when forming and dissolving your business, which reduces costs. You want a more flexible management structure where you can define your own rules.

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The flip side of less legal regulation and lower costs for setting up an LLC is that you don’t have quite as much separation between yourself and the business in a court of law. While either a C corp or LLC can pierce the corporate veil, a C corp is considered a separate legal entity from its owner, while under many circumstances, an LLC is not. 

In addition, a C corp usually requires more people to get it running. A board of directors is required and director and shareholder meetings must be held. In an LLC, however, none of this is necessary unless the LLC’s operating agreement deems it so. In an operating agreement, members can even override state LLC operational rules to implement their own rules for the LLC’s operational procedures. 

Still, an LLC offers far fewer opportunities to raise funds and, so, grow. LLCs do not issue stock like a C corporation does and many investors will not invest in an LLC, preferring to invest in a C corp instead. In fact, some investors can only invest in a C corp. LLCs may struggle to even get a bank loan, while banks are less wary of loaning to a C corporation. So, for companies needing growth potential through rapid funding, a C corp is the best option.

Finally, an LLC is a pass-through entity, meaning profits and losses are taxed at the member level but not the business level. In contrast, profits of a C corp are taxed at both the corporate and shareholder level, meaning a higher overall tax burden. So, when starting a C corp, it’s important to ensure you can raise enough capital to justify this double taxation. If your business’s earning potential under a C corp cannot justify the higher tax burden, an LLC may be a better choice.

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