C-Corporations (C-Corp) are the preferred entity type for large companies because of their flexibility and few restrictions. For example, a C-Corp can have unlimited shareholders and complex debt and equity structures. C-Corporations are legally separate from their shareholders thus providing limited liability to its investors. The biggest drawback to C-Corporations is that they are double-taxed. The corporation pays tax on its net profit and the shareholder pays tax on any dividends it receives from the corporation. 

A C-Corp is ideal if you’re looking to bring in outside investors, private equity, or foreign investors because you can set up the C-Corp in any way you want. This flexibility is why large multinational corporations such as Nike, Amazon, and Google are all C-Corps despite the double taxation.

But, is a C-Corp really the right choice for your business? That depends. Let’s look at the benefits and disadvantages of starting a C-Corp. 

Advantages of a C-Corporation:

Limited liability for shareholders

C-Corp shareholders have no risk beyond their investment in the company. If you invested $10,000 in Amazon (a C-Corp) and it went bankrupt and all of its creditors sued Amazon, you would only risk losing your $10,000.

Best entity type to attract venture capital, private equity, and other investors

The limited liability protection and ability to have a complex corporate structure make C-Corp the most attractive option for venture capitalists and outside investors. 

Unlimited shareholders

Unlike an S-Corporation which is limited to 100 domestic shareholders, a C-Corp can have unlimited and kind of shareholder.

Multiple share classes

Unlike an S-Corporation which can only have one share class, a C-Corp can create many types of share classes to benefit or restrict shareholders. For example, you could create A and B shares. A shares could get 100 votes per share whereas B shares only get 1 vote per share. This allows founders to continue to control the company by retaining A shares which have more voting rights and issuing B shares which have fewer voting rights to the public. 

Unrestricted shareholders

Anyone or any entity can own shares in a C-Corp. There are no restrictions. However, federal rules may limit or restrict certain countries from becoming majority shareholders in certain US industries for national security concerns. Conversely, S-Corporations are restricted by who can be a shareholder.

Perpetual existence

A C-Corporation continues perpetually even upon the death of any shareholder. However, if the passing shareholder was a key member of management and had a majority interest in the company, the future of the company could be in question unless there was good succession planning. 

Easily transferable shares

Shareholders, especially of publicly traded companies, can easily sell or transfer their shares in a C-Corp.

Long history

C-Corps have a very long history of existence and therefore have years of legal precedents supporting their structure. 

Disadvantages of a C-Corporation:

Subject to double taxation

C-Corps are not pass-through entities and as a result, have to pay tax on their net profits. When a C-Corp pays a dividend to a shareholder, that shareholder also pays tax on that income. Since the dividend is not a tax deduction for the corporation the dividend is essentially double taxed on the same income. 

Complex taxation

The taxation of C-Corps is extremely complicated when there are multiple share classes, complex debt or equity offerings, foreign holdings, and international income. 

Cannot pay an unreasonable salary to avoid paying a dividend

C-Corps, like S-Corporations, must pay a reasonable salary. If you are a C-Corp and pay yourself a salary, that salary is a business deduction and lowers the corporation’s net income. While it might be tempting to pay yourself a large salary to have zero net profit and avoid corporate tax, the IRS may deem the salary as a disguised dividend.

If the IRS deems the salary a disguised dividend, then the corporation does not get the deduction, has to pay tax on that additional non-deductible item, and you as a shareholder also have to pay tax on that dividend income.

Recordkeeping

Running a corporation requires regular maintenance such as keeping minutes, books, and regulatory filings.

Compliance

A complex C-Corp, especially a publicly traded one, is subject to various filing requirements with harsh penalties for non-compliance. As a result, most large C-Corps have dedicated compliance departments specifically for complying with regulatory issues among various jurisdictions. 

Regulatory oversight

A publicly traded C-Corp is subject to extreme regulatory scrutiny and oversight. 

Accumulated Earnings Tax

C-Corps cannot hoard earnings to avoid double taxation. Per Internal Revenue Codes 531 and 535, C-Corps are subject to an accumulated earnings tax of 20% on surplus earnings unless they can justify a business reason for maintaining excess reserves. The purpose of the tax is to discourage C-Corporations from accumulating earnings at the corporate level to avoid double taxation from paying dividends. 

Q: What tax forms do C-Corporations file?

A: On a federal level, a C-Corp files Form 1120 each year to report its income and expenses. The C-Corp’s state of incorporation may also require the corporation to file a state income tax return. In addition, the C-Corp may have to file tax returns in the states where it operates, even if it’s not incorporated in that state. For example, Disney is a Delaware corporation and must file Delaware taxes, but it must also file a California tax return because it operates in CA.

Q: How to start a C-Corporation?

A: Forming a C-Corp is similar to forming an S-Corporation because all corporations start as a C-Corporation until they make an election with the IRS to be taxed as an S-Corporation by filing IRS Form 2553.   

Q: Are C-Corporations double taxed?

A: Yes, a C-Corporation pays federal and possibly state tax on its net profit. If it distributes that profit to its shareholders in the form of a dividend, then its shareholders also pay tax on that dividend.  

Q: How can a C-Corporation avoid double taxation?

A: A C-Corporation can avoid double taxation by either retaining its profits and not paying dividends to its shareholders or increasing its expenses to lower its net profit. However, a C-Corporation may be subject to the accumulated earnings tax of 20% if it cannot justify holding excess reserves.

Q: Can a C-Corporation own an S-Corporation? 

A: No, a C-Corporation is a prohibited shareholder in a S-Corporation. S-Corporations are limited to the type and number of shareholders they can have. 

Q: Can an S-Corporation own a C-Corporation?

Yes, an S Corporation can own shares of a C-Corporation with restrictions. An S Corp that owns more than 80% of a C-Corp becomes an affiliated group relationship, but cannot file a consolidated tax return. 

Q: Can a C-Corporation own an LLC?

A: Maybe. It depends on how the LLC is structured. For example, if an LLC elects to be taxed as an S-Corporation, the LLC cannot be owned by a C-Corporation because the C-Corporation is a prohibited shareholder in an S-Corporation. Also, states may have their own restrictions on LLC ownership.

Q: Who pays more tax, a C-Corporation or an S-Corporation?

A: A C-Corporation pays more tax than an S-Corporation because a C-Corporation is subject to federal tax whereas an S-Corporation is not subject to federal taxation because it is a pass-through entity. Also, a C-Corp is subject to double taxation whereas an S-Corporation is not.