In the business world, there are two main types of corporations: C corporations and S corporations.
C corporations are far more common, partially because they’re the “default setting” for corporations — when you file the articles of incorporation, you are filing to form a C corporation.
If the term “C corporation” leaves you with some questions, don’t worry! This guide will help you understand what a C corporation is, how it’s taxed, and how to form one.
Rocket Tip: If you decide that a corporation is right for your company, there are a lot of business formation services like ZenBusiness and LegalZoom are that can help you out for a great price.
What Is a C Corporation?
In legal terms, a corporation is a distinct, taxable entity that is legally separate from its owners, and the C corporation is the default form for a corporation.
Simply put, the members of a corporation do not pay the corporation’s debts, and the corporation does not cover the financial obligations of its members. Similarly, any legal obligations belong to the corporation — if there is a lawsuit, it is against the corporation, not its individual owners.
Practically speaking, the corporation is a group of individuals working together for a common business purpose, and even though they are a group, the corporation has many of the same rights as an individual. For example, a corporation can buy or sell assets, enter contracts, and sue or be sued, just like individuals can.
So why form a corporation and not another entity type? Corporations are the only entity type that can issue stock. Shares of stock allow a corporation to raise funds, which can help the business grow and increase its net worth. No other business type has this same ability to generate funds.
Who Owns the C Corporation?
By purchasing a share of stock, an individual becomes a stakeholder in the corporation.
Your stock shares mean that, in a sense, you own a percentage of the corporation’s profits, and in some cases, owning stock also gives you voting rights. Voting members can help to elect the directors of the corporation. Each shareholder can choose to purchase a significant percentage of the corporation’s shares if they want an increased impact on voting.
Unlike an S corporation — which cannot have more than 100 shareholders — C corporations can issue a near-infinite number of shares, which allows for limitless growth. However, the corporation’s bylaws may set a limit on how many shares one person can own, as well as how many total shares the corporation may issue.
C corporations also have the authority to issue multiple classes of stock, whereas S corporations can have only one type. In most corporations with more than one class of stock, there are at least two types, which are referred to as Class A and Class B. The distinction between these classes is voting rights — specifically, Class A stock has greater voting privileges than Class B stock.
It’s up to each individual C corporation to determine how many votes each share of stock holds. You could award Class A shares ten votes to a Class B share’s one vote, you could give Class A shares 25 votes compared to two votes for a Class B share, etc.
Who Leads a C Corporation?
Even though shareholders can vote, that does not mean they are the leaders of the corporation. Instead, the shareholders vote for who will lead the corporation: the board of directors.
The only directors who are not elected by the shareholders are the initial directors — those directors are appointed by the articles of incorporation.
The board of directors has the responsibility of appointing the corporation’s officers, who handle the day-to-day management of the business. For example, the CEO (Chief Executive Officer) serves as a manager for the business, while the CFO (Chief Financial Officer) oversees the main financial decisions in the daily affairs of the corporation.
How Is a C Corporation Taxed?
As far as day-to-day operations go, a C corporation and an S corporation operate almost identically. On tax day, though, the two corporation types look quite different.
Tax professionals refer to a C corporation’s taxation as “double taxation.” Here’s how it works: each tax period, the corporation itself reports its income on its tax return, which is taxed at the standard corporate income tax rate of 21%.
Once the corporation itself has paid its taxes, it pays dividends from its remaining profits to its shareholders, and each shareholder has to report income from those stock dividends on his or her tax report. In that sense, the corporation’s income gets taxed twice. For more information on the difference between C corporation and S corporation taxation, check out our comparison guide.
There are only two states that do not require a corporate income tax or similar tax: South Dakota and Wyoming. Still, corporate income tax is just one of many taxes that a corporation has to pay. Other taxes include unemployment insurance taxes, Social Security taxes, and Medicare, just to name a few.
There may also be taxes which are specific to your state. For example, most states also require sales and use tax, fuel tax, alcohol tax, and cigarette taxes. It’s important that you consult your Secretary of State for more information on taxes, especially those which are industry-specific, as those taxes can vary considerably from state to state.
How Is a C Corporation Formed?
Forming a C corporation requires both time and money. While we won’t go into too much detail, we’ll use this section to cover the basics of forming a C corporation.
Before you get into the paperwork of your corporation, you’ll need to choose a name for your business. Your name needs to be distinct from other businesses in your state, and it should comply with all local laws. Your Secretary of State’s website likely has information on business names. You can also reserve a name for a period of time if you wish.
Next, you’ll need to appoint a registered agent and your initial board of directors. When you file your articles of incorporation, you’ll be asked to provide the names, addresses, and signatures of the registered agent and your directors. The articles of incorporation is the document that officially forms your corporation, so it’s important to file the articles correctly.
After the state accepts your filing, you can proceed to register for taxes, acquire your federal tax ID number (EIN), and apply for business licenses.
Getting Help Forming Your C Corporation
If any of the above steps sound confusing, then help is available to you! Many successful businesses enlist the services of tax professionals each year, because taxes can be one of the most confusing aspects of running a C corporation.
For help starting your business, you can use an online incorporation service (ex: ZenBusiness and Northwest). These companies charge a mere fraction of what a business attorney would cost, and they have the experience to form your C corporation in compliant fashion. If you’re interested in this option, we recommend checking out our guide to the top incorporation services.