Key takeaways
- A C corporation is a business structure that offers limited liability protection and can have an unlimited number of shareholders.
- C corps can be attractive to investors because they can issue multiple classes of stock, but they come with more paperwork and ongoing requirements.
- C corps may face double taxation: the corporation pays tax on its income, and shareholders may also pay tax on dividends.
Structuring your business as a C corporation can create more options for long-term growth. C corps can issue stock, attract venture capital and scale more easily than many other business structures.
However, C corps often come with higher costs and more complexity. You may face double taxation — with profits taxed at the corporate level and again when distributed to shareholders — along with more extensive reporting, recordkeeping and compliance requirements.
What is a C corporation?
A C corporation is a business entity that provides limited liability. This means the company, not its shareholders or owners, is typically held legally responsible for the company’s debt and other obligations.
A C corp can have an unlimited number of investors. They can be individuals or entities, such as banks or investment groups. A C corporation can also issue different classes of stock, which can give shareholders different rights.. Virtually all public companies are C corps.
However, you’ll have to deal with double taxation. The corporation pays taxes on its taxable income. And when dividends are paid to shareholders, they may also pay taxes on those dividends, even though the earnings were already taxed at the corporate level.
Pros and cons of a C corporation
C corporations come with meaningful benefits — like easier fundraising and limited liability — but they also bring tradeoffs, including added complexity and the potential for double taxation.
Benefits of a C corporation
| You can have an unlimited number of investors. |
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| Investors often prefer C corps. |
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| It can help lower healthcare costs. |
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Drawbacks of C corporation
| You may face double taxation on profits. |
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| It can be more complex to set up and maintain. |
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How to start a C corporation
1. Pick a name for the company
Name your corporation, then do a thorough search of public databases in the state of incorporation and in any state in which you plan to do business. The website of the secretary of state’s office (or state equivalent agency) is a good place to start.
2. Get an employer identification number (EIN)
The IRS requires all corporations to have an EIN.
3. Name officers, a board of directors and draft a set of bylaws
This is required at the state level from the corporation’s inception. For example, New York requires new corporations to hold an organization meeting to elect a board and enact bylaws.
4. Incorporate your business
Each state has its own forms, procedures and fees. For example, it costs $100 to file articles of incorporation in California and $125 in New York. The agency responsible for business entities may have a different name depending on the state. In California, you file with the secretary of state. In Delaware, the comparable office is the Division of Corporations.
