WTF? / Part 2 / 2.9
What is a C corporation?

C corporation

THE 30-SECOND ANSWER

A C corporation is a corporation taxed as a separate taxpayer under the regular corporate rules, which is how a corporation is taxed unless it elects S status. The corporation pays federal income tax on its profit, and shareholders may pay tax again on dividends.

Business structures and tax elections can have legal and tax consequences that depend on your ownership, state, income and specific circumstances. Blueprint explains the concepts. A CPA or attorney can evaluate how they apply to your business.

In plain English

A corporation is created under state law. Its owners are shareholders, who exchange money, property or both for the corporation's stock. The tax code defines a C corporation simply as a corporation that is not an S corporation for that year. For federal tax purposes, a C corporation is its own taxpayer. It files Form 1120 and pays tax on its taxable income.

Profit is taxed to the corporation when it is earned, then taxed to shareholders when it is paid out as dividends. The corporation gets no deduction for the dividends it pays, and shareholders cannot deduct the corporation's losses. That is the double taxation people talk about.

An LLC can also choose to be taxed as a corporation by filing IRS Form 8832. It stays an LLC under state law. Taxed as a corporation without an S election, it files Form 1120 like any C corporation.

Example

Illustrative only: a resale company is incorporated and has not elected S status. It files Form 1120 and pays federal income tax on its profit. When it pays a dividend, each shareholder reports that dividend on their own return. The owners who work in the business are paid wages through payroll.

Why it matters

Double taxation makes a C corporation sound like a mistake. It is not automatically one. A C corporation is not subject to the S corporation limits on how many shareholders it can have, what kinds of owners it can have, or how many classes of stock it can issue. Corporations can raise money by selling stock. That can matter for a business planning to bring in outside investors or eventually sell. Whether it fits is a question for a CPA and an attorney.

COMMON MISTAKEDeciding on one tax line alone. A C corporation is not always wrong because of double taxation, and not always right because someone else's company used one. It depends on how the business will be owned, funded and paid out.

Where people get confused

"Corporation" and "C corporation" are not quite the same thing. Corporation describes the legal entity your state creates. C and S describe how the IRS taxes it. A corporation that elects S status is still a corporation.

Owners who work in the business are not paid the way sole proprietors are. Under federal employment tax rules, corporate officers who perform services and receive payments for them are employees, and those payments are wages.

Sources

Related

2.8S corporation2.3LLC1.5Profit3.6P&L6.5Enterprise value

Business structure

STARTLLC vs. S corp vs. C corp: what's actually differentSTARTSole proprietor vs. LLC: what changes when you form oneSTARTSingle-member vs. multi-member LLC: what a second owner changesSTARTShould an LLC elect S corp taxation?STARTWhen should you talk to a CPA about changing your business structure?
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