What Is a C Corporation?

January 28, 2021
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The majority of well-known, successful US companies are corporations. Specifically, many of them are C corporations—think Apple, Walmart, General Motors, McDonalds. 


But what is a C corporation? A C corp is a legal structure for a business that separates owners’ assets from those of the business. This makes the company’s profit “double taxed” because the corporation and the owners of the corporation both must pay taxes.


Below, we’ll cover:


  • A basic overview of C corporations
  • An Overview of other business legal structures
  • What steps you need to take to launch as a C corp


C Corporation 101

C corporations are the most common of the corporation legal structures (as opposed to S corp, B corp, etc.—touched on briefly below). So much so, an organization simply referred to as a “corporation” is often a C corp, which also accounts for the vast majority of publicly traded companies. 


Structuring your business as a C corp means that the business is a completely separate entity from its owners. It exists independently and irrespective of them, for corporate tax and legal purposes. A C corp makes its own profits and can be held legally liable for offenses. If and when a given shareholder leaves the C corp, or sells away their shares, the business entity can proceed with little to no impact.


Separation is a defining feature of a C corp. Owners are insulated from legal and financial liability that the company accrues.


Pros and Cons of C Corporations

The separation a C corp grants is not always in the business owner’s favor, and some aspiring business owners might prioritize other factors when starting up their company. To that end, here are the benefits and drawbacks of a C corp business entity:


Pros: 


  • Strongest legal protection – A C corp offers limited liability to its owners (shareholders), which means that they are generally not liable for debts or obligations that the company itself is responsible for.


  • Easiest structure to raise outside funds with – C corps can raise money from investors more easily than other corporate structures (e.g., LLCs) and can sell stock in the company to raise funds. 


  • Ability to simply offer stock options – Thanks to the ease of doling out stock options, C corps can use shares in the company as a way of attracting high-quality employees for executive and management positions—allowing them stake in the company’s success.


Cons: 


  • Burdensome formal requirements – C corps are costly to form and operate. They require diligent reporting on all company affairs, which can be burdensome for smaller companies with limited resources.


  • “Double” taxation on profits – A large downside of a C corporation is that profits are taxed twice. According to the IRS’ guide to forming a corporation, profits are taxed when earned by the C corp, then again when passed on to shareholders. Shareholders also can’t deduct losses on corporate income.


Other Common Business Structures

For prospective business owners looking to launch a C corp business entity, the protection this structure offers can be a major boon. For businesses on the smaller side, the costs might not outweigh the benefits for a small business owner. 


The other common business structures to compare include:


  • Limited liability company (LLC) – An LLC offers separation of personal and business assets, limiting personal liability for the company’s debts and obligations. Profits and losses can more easily “pass through” to personal taxes. LLCs require less formal structure than a C corp, and they’re often smaller.


Related: C Corp vs. LLC: What's the Difference?


  • Sole proprietorship – This barebones structure offers no separation between business and personal assets, as well as limited abilities to secure funding (stock can’t be sold). This is how your singular business activity is seen in the eyes of the law before you officially register it, or even if you never register it at all.


  • Partnership – If your business has more than one owner, partnerships offer another simple structure that comes in two main varieties. Limited liability partnerships (LLP), offering limited liability to all partners. And limited partnerships (LP), offering unlimited liability for one “general” partner and limited liability (and limited control over the company) for any and all other partners.


  • S corporations – Which require the same formalities of C corporations, as well as extra restrictions on size (no more than 100 shareholders), but they allow for profits and losses to pass through to shareholders’ personal taxes, meaning no double taxation. 


  • B corporations – Which are organized around a particular mission that provides a public benefit. They are taxed like C corps but have higher standards for transparency and accountability, relative to their mission.


  • Close corporations – Corporations that are owned by a small group of shareholders. As such, they’re typically unable to sell stock publicly. However, they are generally not required to implement the same degree of formal structure as a C or S corp.


  • Nonprofit corporations – These are tax exempt because they exist to provide a public good through religious, educational, or other means, rather than generating profit. They still must follow the formal requirements of C corps.


How to Choose the Right Structure for You

Don’t know which business ownership is best for you? With all of these options in mind, it can be challenging to know what structure is right for your prospective business. The answer depends on what you prioritize most:


  • Ease of start up and operation – If your primary objective is starting up your business activities as soon as possible, with the least amount of hassle, your best bet might be a sole proprietorship or partnership (depending on how many business owners there are).


  • Protection and funding – If your priorities include legal separation and the possibility for rapid growth, your best options are likely C corps or S corps. However, you’ll need to have planning and resources in place for the formal requirements.


  • Flexibility and a happy medium – If your main goal is to strike a balance between the robust protections of corporations and the ease and flexibility of a sole proprietorship, your best bet is an LLC. Be aware that funding may be harder to secure, at least at first.


Whatever business structure you choose, it’s important to make an informed decision. While you may be able to change the structure later, this could lead to various complications, like fallout with shareholders or new restrictions based on your location.


6 Steps to Launch as a C Corp

As noted above, one of the drawbacks to a C corp is that it requires more formal elements than an LLC or other structure—at launch and throughout the life of the business.


There are 6 main steps to launching as a C corp:


  1. Picking a name – More than a simple selection: you need to check with your state business office, and the US Patent and Trademark Office, to ensure your name is unique.


  1. Appointing officers – Your corporation must have at least one director and at least one officer—if you are the only owner, you may elect yourself to be the only one of each.


  1. Filing with the state – You will need to file your articles of incorporation with your state, which typically involves a fee. This and various other paperwork needs can be facilitated by an attorney or through all-in-one startup services, like Clerky or Stripe Atlas.


  1. Writing your bylaws – A C corp also needs to have bylaws documented, including rules about when and how often directors’ meetings will be held and how officers can vote on business decisions. These are required even if you are the sole director and officer in the C corp.


  1. Issuing company stock – Your C corp needs to distribute shares of stock. Even if 100% are owned by one person (in the case of a sole owner, director, officer), this still needs to be documented. If you have more than 35 shareholders, you will need to register the shares with the Securities and Exchange Commission (SEC).


  1. Holding regular meetings – Finally, you’ll need to follow up on the formal processes recorded in your officer appointments and drafted bylaws. In practice, that means holding regular meetings and recording minutes to make available upon request. Failure to follow the bylaws you set out could result in the loss of C corp status.


Power Your C Corporation With Ramp

So, to revisit the question from above: what is a c-corporation?


Put simply, it’s a business structure that offers the business owners insulation from financial and legal liability, as well as greater potential for investment funding. This comes at the cost of extraneous formal requirements and “double” taxation. By weighing these factors against the qualities of other business structures, you’ll be well positioned to make the right decision for your business.


Regardless of which structure you choose, to ensure your company excels, you need real-time visibility over your finances. Ramp’s smart corporate card comes with built-in features like an expense management platform and a vendor management control center to offer transparency into company-wide spending.


To power your corporation, check out the full extent of Ramp’s capabilities.


Sources

Houston Chronicle

Internal Revenue Service

LegalZoom

Small Business Association


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