What Is a C Corporation? Pros, Cons and When To Consider Forming One

Of the 267 million U.S. tax returns filed for 2024, only about 2.3 million belonged to C corporations, representing less than 1% of total tax returns, according to the IRS. At the same time, that 1% includes returns for nearly every major public company in the country.

This is because C corporation ownership rules are ideal for large-scale growth, but their tax and compliance requirements can be uniquely challenging, especially for small businesses. Let’s explore how C corporations work compared to other entity types to help you determine whether it makes sense to become one.

What Is a C Corporation?

A C corporation, or C corp, is a type of business entity that’s legally separate from its owners, known as shareholders. This separation—often referred to as corporate personhood—lets C corps function independently in certain ways, such as by entering contracts and owning property.

One of the most notable results of corporate personhood is that C corp shareholders enjoy limited liability protection, which means they generally aren’t liable for company debts. If your C corp defaults or gets sued, you don’t have to worry about its creditors coming after your personal funds or assets.

The other defining characteristic of C corporations is their unique tax treatment, known as double taxation. This means that C corp income is taxed twice: first at the corporate level, then again at the individual level once paid out to shareholders.

C Corps vs Other Types of Business Entities

C corps stand in contrast with passthrough entities, which don’t pay taxes at the entity level. Instead, they pass all of their profits or losses to their owners, who have to report their share of the company’s activities on their personal tax returns.

Here’s how these other types of business entities compare to C corps:

• C corp vs S corp: S corps provide limited liability protection while avoiding the double taxation that C corps face. However, they have much more restrictive ownership requirements than C corps, such as only allowing up to 100 shareholders and one class of stock.
• C corp vs LLC: Limited liability companies, or LLCs, don’t allow the same payroll tax strategies as C corps and S corps, but they provide limited liability protection and avoid double taxation. They also have fewer ownership restrictions and require less ongoing paperwork work than corporations.
• C corp vs sole proprietorships and partnerships: These are the simplest business entity structures, requiring no paperwork to set up or maintain. Unlike the others, they don’t qualify as legally separate from their owners, which means there’s no double taxation or limited liability protection.

Pros and Cons of a C Corp

There are a variety of pros and cons for the C corp entity structure—here are the most significant.

Advantages of C Corporations

C corporations have advantages that can make them ideal for certain businesses, especially if you’re looking to scale aggressively:

• Ownership flexibility: There are no restrictions on the number or type of shareholders for C corps.
• Access to funding: Venture capitalists and other investors may prefer C corps to other structures, especially since C corps can issue multiple stock classes.
• Perpetual existence: C corps can continue to exist as a separate legal entity even if their owners sell their shares or pass away. 
• Flat corporate tax rate: C corps pay a flat 21% corporate income tax rate, which can be lower than the effective individual income tax rate on distributed profits.

Disadvantages of C Corporations

While C corporations have their benefits, certain drawbacks may prevent them from being suitable for some small business owners:

• Double taxation: C corp profits are taxed twice: once at the corporate level and again at the shareholder level when distributed.
• Added compliance: C corps face a greater upfront and ongoing compliance burden than other entity structures. For example, you have to hold annual meetings, take minutes at each one, and maintain a board of directors.

Pro Tip: Keep in mind that the additional regulatory requirements C corps face often result in higher professional service costs due to an increased need for legal and accounting help.

Growth at Scale: When To Form a C Corp

Operating as a C corp is typically an effective strategy when you want to grow at scale. Their flexible ownership structures and popularity with investors make C corps one of the best vehicles for equity fundraising.

For example, a C corp might make sense when you’re seeking venture capital, raising funds from other institutional investors, or planning to take your company to an initial public offering (IPO). In each of these scenarios, being able to support multiple stock classes and unlimited shareholders is essential.

These situations often go hand in hand with another good reason to consider forming a C corp: you’re consistently reinvesting any profits back into the company, rather than distributing them out to owners.

Often done to help drive growth, this mitigates the effects of double taxation, since corporate income that’s retained (instead of distributed) only gets taxed once, at the corporate level, since owners don’t receive or report it.

What To Consider Before Forming a C Corp

If you’re seeing signs that a C corp might make sense, don’t rush off to incorporate too soon. There are significant implications to the decision that go beyond the immediate pros and cons of the C corp entity structure.

For example, in addition to requiring formal governance practices, many states impose extra fees or franchise taxes on C corps that can be burdensome. California’s include an additional 8.84% corporate income tax with an $800 minimum.

Similarly, forming a C corp significantly complicates your company ownership, capital structure and administrative overhead. For instance, you’ll need to adopt a formal process for issuing and tracking shares, which requires strict recordkeeping and careful navigation of regulations. 

If you’ve been operating as another entity structure—as opposed to starting your C corp from scratch—transitioning into a C corp can be especially complex. For example, it may also require you to:

• Review and update operating agreements into bylaws
• Renegotiate certain contracts with lenders or investors
• Revise your business and individual income tax strategy

Before forming a C corp or making any other change to your business’s legal entity structure, it’s often worth consulting with legal and accounting professionals. They can answer any questions you may have and help you avoid costly mistakes.

How To Register a C Corp

Here’s a step-by-step guide to registering a C corp at the federal and state levels:

• Choose a state of incorporation: Since you don’t have to incorporate in your home state, many business owners choose to register their C corps in business-friendly states, like Delaware.
• Find a unique business name: Your C corp must have a name that’s unique in your state of incorporation and complies with your state’s naming requirements. 
• Designate a registered agent: You need someone with a physical address in your state of incorporation to receive legal and tax documents for your company.
• File articles of incorporation: Submit this official document to the Secretary of State in your state of incorporation. Most states have an online portal.
• Create corporate bylaws: These are the equivalent of an operating agreement for your corporation. They are essential for governing internal processes.
• Hold a corporate meeting: Hold your first official meeting to take formal steps, like adopting bylaws, issuing stock to shareholders, and appointing officers and the board of directors.
• Register for state and local taxes: Make sure you have an Employer Identification Number (EIN) and register for any applicable state and local business taxes, such as sales taxes.

Pro Tip: Remember to keep careful records of each step in the incorporation process. This should include making copies of all the documents you file and taking detailed minutes at your initial corporate meeting.

Tax Planning for C Corp Owners

Taxes are one of the most significant considerations when choosing an entity structure, and C corps receive a unique tax treatment in the form of double taxation.

First, C corps report their profits on a separate corporate tax return and pay a flat 21% tax on the amount. If they distribute those profits to owners, each one has to report their share again personally and pay individual income taxes on the amount.

For example, say a C corp earns $500,000 in taxable income. It pays $105,000 in federal corporate taxes (21%), leaving $395,000, then distributes $100,000 as a dividend. Each shareholder reports and pays taxes on their portion of the $100,000 at their individual tax rates.

Because of this multi-layered tax system, tax planning is especially necessary for C corps. Professional guidance is often necessary to optimize decisions like:

• What portion of profits to reinvest versus distribute
• When to make dividend payments to shareholders
• How big of a salary to pay owners who work for the corporation

In addition to consulting a corporate tax professional before forming a new C corp, consider hiring one in an ongoing capacity after making the change. They can help you implement an effective long-term strategy and navigate evolving tax regulations.

Do C Corps Get 1099 Forms?

C corps generally don’t get 1099 forms, even if they receive payments that would otherwise trigger one. This is because you’re typically not required to report payments to C corps on 1099s, even if the amount exceeds $600.

However, there are some exceptions, such as for:

• Gross proceeds paid to an attorney
• Cash payments when buying fish for resale
• Payments made by a federal executive agency
• Medical and healthcare payments
• Substitute payments in lieu of dividends

Get Expert Advice With Paro

With its flexible ownership rules, investor appeal and long-term stability, C corp status can be an excellent option when scaling your business to the highest levels. However, it also comes with increased tax complexity and compliance requirements that can be tough to manage alone. Fortunately, whether you’re forming a C corp or navigating the implications of making the switch, Paro can provide the support you need. Schedule a free consultation for our corporate tax advisory services to partner with a professional whose expertise matches your needs.