What Is a C Corp? Definition, Taxation, and Ownership

Search Fintrev

Search our guides, reviews and glossary.

A C corp (C corporation) is a business entity that is legally separate from its owners, the shareholders, and is taxed as its own taxpayer under Subchapter C of the U.S. Internal Revenue Code. That subchapter is where the “C” comes from. The corporation pays income tax on its profits. If it then distributes some of those profits as dividends, shareholders pay personal income tax on what they receive. This two-level tax, usually called double taxation, is the feature that most clearly separates a C corp from S corporations and LLCs. In exchange, the C corp offers limited liability, unlimited shareholders, multiple classes of stock and an existence that continues regardless of who owns it.

How a C Corp Works

Ownership and shares

Ownership of a C corp is divided into shares of stock, and shareholders own the company in proportion to their holdings. Because the corporation exists separately from its owners, shares can be sold, gifted or inherited without dissolving the business. A C corp can also issue more than one class of stock, such as common and preferred shares with different voting or dividend rights. An S corp cannot do this.

Separation of ownership and management

Shareholders elect a board of directors, which sets broad policy and appoints officers (CEO, CFO and others) to run daily operations. Managers act on behalf of owners and their interests can diverge (the principal-agent problem), so the board oversees management for the shareholders. In a small C corp, one person may be the sole shareholder, director and officer at the same time, but the roles remain legally distinct.

Corporate formalities

Corporate status brings recordkeeping duties: adopting bylaws and keeping them at the principal place of business, holding at least one annual meeting of shareholders and directors, recording minutes and directors’ voting records, and maintaining a register of shareholders and their ownership percentages. C corps also file annual state reports and prepare financial statements. Skipping these formalities can weaken the liability shield. Courts can “pierce the corporate veil” when a corporation is run as an extension of its owner.

How a C corp is taxed

The corporation reports its income, deductions and credits on IRS Form 1120 and pays tax at the federal corporate rate of 21%. That flat rate has applied since the Tax Cuts and Jobs Act of 2017 replaced the earlier graduated brackets. States may impose their own corporate income or franchise taxes. The corporation also handles payroll obligations for employees: withholding, Social Security and Medicare, and unemployment taxes.

Money leaves a C corp in two main ways, and they are taxed differently:

• Salary and wages paid to owner-employees are deductible business expenses for the corporation and taxable wages for the employee. Compensation must be reasonable for the work performed.
• Dividends are paid from after-tax profits, are not deductible by the corporation, and are taxed again on the shareholder’s personal return. Shareholders typically receive Form 1099-DIV showing these distributions.

The corporation does not have to pay dividends. Profits it keeps as retained earnings are taxed only at the corporate level until they are distributed or until shareholders sell their shares and realize a capital gain.

Example of a C Corp: Double Taxation in Numbers

The following is a hypothetical example illustrating the mechanics. It assumes federal taxes only, ignores state taxes and the 3.8% net investment income tax, and assumes the dividends qualify for a 15% shareholder rate. Qualified dividends are taxed at 0%, 15% or 20% depending on the shareholder’s income.

The combined federal tax on the original $1,000,000 is $328,500, an effective rate of 32.85%. The formula is:

Combined rate = corporate rate + (1 − corporate rate) × dividend rate = 0.21 + (0.79 × 0.15) = 0.3285

Two adjustments change the outcome. If the corporation retains the $790,000 instead of distributing it, the second layer of tax is deferred. If part of the $1,000,000 is paid as reasonable salary to owner-employees, that portion escapes corporate tax because it is deductible. It is then taxed as wages, including payroll taxes.

Steps to Create a C Corp

1. Choose an available name and confirm it is not already registered in the state.
2. File articles of incorporation (sometimes called a certificate of incorporation) with the Secretary of State, and pay the filing fee.
3. Appoint a board of directors and adopt bylaws governing how the corporation operates.
4. Issue stock to the initial shareholders, who become the owners.
5. Obtain an employer identification number (EIN) from the IRS by filing Form SS-4. Then register for state income, payroll, unemployment and disability taxes as required. Depending on the industry, additional licenses or permits may apply.

No separate federal election is needed to be a C corp. A newly formed corporation is taxed under Subchapter C by default. To be taxed as an S corp instead, the corporation must qualify and file Form 2553.

Why a C Corp Is Used

The C corp structure suits businesses that plan to bring in investors, offer equity to employees or eventually list shares on an exchange. It allows unlimited shareholders of any type (individuals, other corporations, funds, foreign investors) and multiple classes of stock. It also continues when shareholders come and go, managers are replaced, or founders retire or die. Companies whose stock trades publicly, including the large U.S. companies in the S&P 500, are generally C corporations.

Selling stock to the public is regulated. The offering must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933 unless an exemption applies, and companies above certain size and shareholder thresholds take on ongoing SEC reporting obligations.

Pros and Cons of a C Corp

Advantages

• Limited liability for shareholders, directors, officers and employees.
• Ability to raise large amounts of capital by selling stock.
• No limit on the number or type of shareholders, and flexibility to issue different stock classes.
• Perpetual existence independent of ownership changes.
• Retained profits are taxed only at the flat corporate rate until distributed.

Disadvantages

• Double taxation on profits distributed as dividends.
• Business losses stay inside the corporation, unlike losses of S corp shareholders or LLC members.
• Higher formation and legal costs, plus ongoing formalities and recordkeeping.
• Greater regulatory scrutiny, especially once securities are sold to the public.

C Corp vs. S Corp

An S corporation is not a different kind of legal entity. It is a corporation that has elected special tax treatment under Subchapter S. Both offer the same limited liability, and incorporation is essentially the same process. The differences are tax treatment and ownership rules:

• Taxation: an S corp is a pass-through entity. It generally pays no federal corporate income tax. Income, deductions, losses and credits flow through to shareholders’ personal returns. A C corp pays tax itself, and dividends are taxed again.
• Shareholder limits: an S corp may have no more than 100 shareholders. A C corp has no limit.
• Eligible owners: S corp shareholders must generally be U.S. citizens or residents and certain trusts and estates. An S corp cannot be owned by a C corp, another S corp or an LLC taxed as a partnership. A C corp can be owned by anyone.
• Stock classes: an S corp is limited to one class of stock. A C corp can have several.

C Corp vs. LLC

A limited liability company (LLC) also shields its owners (called members) from the business’s liabilities. It is created under separate state LLC statutes and is generally less formal, with no required board or annual shareholder meetings. By default, an LLC’s profits pass through to members without entity-level tax, though an LLC can elect to be taxed as a C corp or, if eligible, as an S corp. LLCs suit small businesses wanting liability protection without corporate formalities. The C corp is better suited to raising equity capital from many investors.

“Inc.” or “Corp.” in a company’s name signals a corporation. It does not reveal whether that corporation is taxed as a C corp or an S corp.

Limitations of a C Corp

Beyond double taxation, the structure creates friction for owners of small, closely held businesses. Losses in early years cannot offset owners’ other income. They can only be carried forward to offset future corporate profits. Federal corporate income tax paid is not itself deductible when computing that tax.

The Corporate Transparency Act of 2021 required many corporations to report the individuals who ultimately own or control them to the Financial Crimes Enforcement Network (FinCEN) starting in 2024, to curb anonymous shell companies. In March 2025, that requirement was lifted for U.S. companies.

FAQs

The Bottom Line

The C corp structure fits businesses that plan to bring in investors, offer equity to employees or list shares publicly. Owners of small, closely held businesses face double taxation, trapped losses and ongoing formalities, and an LLC often suits them better. Paying reasonable salaries to owner-employees and retaining earnings can reduce or defer the second layer of tax.