What Is a C Corporation?

The Basic Definition

A C corporation is a corporation taxed under Subchapter C of the Internal Revenue Code, which is the default tax treatment for any newly formed corporation that hasn't made a separate election to be taxed differently. Legally, it's a distinct entity from its owners: it can own property, enter contracts, sue and be sued, and continues to exist regardless of changes in its ownership, separate from the individuals who founded or invested in it.

How a C Corporation Is Taxed

A C corporation files its own federal income tax return, Form 1120, and pays tax on its profit at a flat 21% rate, per the IRS. If the corporation distributes profit to shareholders as dividends, those shareholders report and pay tax on the dividends on their own individual returns, creating the pattern commonly called double taxation, since the same profit is taxed once at the corporate level and again at the shareholder level. See our guide to C corporation tax basics for the full picture, including estimated tax and state-level taxes.

Liability Protection

Like any corporation, a C corporation shields its shareholders' personal assets from the business's debts and legal liabilities in most circumstances, per the SBA. A shareholder's financial risk is generally limited to what they've invested in the company's stock, a protection that can be lost if a court "pierces the corporate veil" due to fraud or a failure to maintain corporate formalities.

Unlimited, Unrestricted Ownership

Unlike an S corporation, a C corporation has no cap on the number of shareholders and no restriction on who can hold its stock. Individuals, other corporations, LLCs, trusts, foreign investors, and venture capital funds can all own C corporation stock in any combination, which is one reason a C corporation can support a far more complex capitalization table than an S corporation's eligibility rules would allow. See our guide on S corporation shareholder limits for that comparison.

Multiple Classes of Stock Are Allowed

A C corporation can issue multiple classes of stock with different rights, commonly common stock for founders and employees and preferred stock with liquidation and dividend preferences for investors. This flexibility is a key reason venture-backed startups almost always use a C corporation structure, since the layered stock classes a typical financing round requires aren't available to an S corporation under its one-class-of-stock rule.

Perpetual Existence

A C corporation's existence doesn't depend on any particular shareholder staying involved; the entity continues even as stock changes hands through sale, gift, or inheritance, until it's formally dissolved. This separates ownership transitions from the business's legal continuity in a way that matters for succession planning and long-term institutional investment.

Who Typically Chooses a C Corporation

Businesses planning to raise venture capital or private equity funding, businesses that expect to eventually go public, and businesses that want to offer employee stock options in a widely understood form generally choose a C corporation, since investors' fund structures and typical deal terms are built around this entity type. A profitable, closely held business that doesn't plan to raise outside equity often considers an S election instead specifically to avoid double taxation; see our guide on whether a C corporation can elect S corporation status.

How It Differs From an LLC

An LLC is taxed on a pass-through basis by default and has fewer required formalities than a corporation. A C corporation requires a board of directors, officers, bylaws, and more extensive recordkeeping, but its stock-based ownership structure and investor familiarity make it the standard choice for a business that expects significant outside investment. See our full corporation vs. LLC comparison for more on this tradeoff.

Double Taxation Is a Real Cost, Not Just a Label

Before choosing C corporation status for a profitable, closely held business, understand that double taxation is an actual additional tax cost on distributed profit, not just a technical classification. Weigh it against the benefits of unrestricted ownership and multiple stock classes for your specific plans.

Retained Earnings Have Their Own Limits

A C corporation can reduce the impact of double taxation by retaining profit rather than distributing it, but the IRS can apply the accumulated earnings tax if retention goes beyond the reasonable needs of the business. See our guide on retained earnings in a C corporation for the specific thresholds.

Corporate Formalities Aren't Optional

A C corporation's liability protection depends on maintaining its formalities: a functioning board, documented decisions, and separation between personal and corporate finances. Treat these as required maintenance, not paperwork you can skip once the entity is formed.

This Is Not Legal or Tax Advice

Whether a C corporation is the right structure depends on your fundraising plans, profit level, and ownership goals. Talk to a business attorney and a tax professional before incorporating or before converting an existing business into one.