What is a C Corporation

A corporation is a business entity created under state law, that stands as an independent legal person apart from its shareholders and directors.

A corporation's owners, known as shareholders, receive the benefit of limited liability for the obligations of the corporation, and are thus ordinarily shielded from the corporation's creditors even in the event that the corporation lacks sufficient capital or resources to satisfy its debts and obligations.

Procedural requirements imposed on corporations may deter some businesses from opting to incorporate. For example, a corporation must appoint officers, must hold annual meetings, and must make annual filings with the state.

Corporations are treated as C Corporations unless they elect to be treated as S Corporations.

Advantages of the C Corporation

The C Corporation is a well-established corporate form that offers protection from liability to its shareholders. There is no corporate form with stronger liability limits, and those limits have been well-defined by court decisions.

While some other business entities may be useful for some larger organizations or professional service providers, notably law firms, accounting firms, medical practices, and similar professional practices that may be restricted from forming as corporations, the advantages to larger companies in operating as a C Corporation should be considered when making a choice of business entity.

Unlike an S Corporation, which is restricted in who may become a shareholder and in their total number of shareholders, there is no limit on the number of shareholders and shares may be held by people who are neither citizens nor residents of the United States. C Corporations may also enjoy tax advantages over other business entities.

A C Corporation may become a public corporation, with its shares being bought and sold either through a stock market or "over the counter".

Taxation of C Corporations

A C Corporation prepares an annual tax return, deducting its business expenses from revenues in order to determine and declare its taxable income. Generally speaking, the corporation's taxable income will be the money the corporation retains at the end of the year for its future needs and operating expenses, and the amount it distributes to its shareholders as dividends.

The C Corporation may ordinarily deduct the entire value of the fringe benefits offered to shareholders who also serve as employees. Fringe benefits packages may include:

  • Medical and Dental Insurance
  • Disability Insurance
  • Dependent Care Assistance Plans
  • Educational Assistance Programs
  • Qualified Transportation Benefits

Caps apply to deductions for medical, long-term care and disability insurance. For some fringe benefits, non-discrimination rules apply, meaning that the corporation may only take a deduction for the benefit if it is made available to all employees.

As compared to other business entities, a C Corporation enjoys considerable flexibility in its ability to carry corporate losses forward to future tax years, meaning that it will normally be easier for a C Corporation to deduct the full value of its losses from its present and future income as compared to other entities.

For some business owners, the corporate tax rate will be lower than their personal marginal tax rate, and they may thus obtain a benefit from having the corporation retain profits taxed at the lower rate.

Any increase in the personal income tax rate or reduction of the corporate tax rate makes formation as a C Corporation potentially more attractive. However, as the evaluation of the tax benefits of incorporating, choosing between an S Corporation or C Corporation, and with limits on the amount of income a corporation may retain, the assessment of any tax benefit is best made with the advice of a qualified financial professional.

Disadvantages of the C Corporation

In some circumstances, corporate profits will be subject to double taxation: first as corporate income and second as income to the shareholder who receives a distribution of the profits (usually in the form of a dividend). For example, if a corporation issues dividends from its profits it has already paid corporate income tax on that money, but the dividends remain taxable as income to the shareholders.

The C Corporation cannot pass through losses to investors, as can an S Corporation, Limited Liability Company (LLC), or unincorporated entity.

The salaries of the officers of C Corporations may trigger a review by the IRS to determine if the owners are compensating themselves below market rates in order to avoid paying employment taxes on their full income, while issuing themselves dividends that are not subject to employment tax.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Apr 13, 2018.