Choosing the right corporate structure is a decision with important consequences for your business and its owners and shareholders. One option is a C corporation (C corp), a popular choice for businesses across a variety of industries that are positioning themselves for growth from day one.

Below, we'll explain how C corporations work, their benefits and drawbacks, how they differ from other corporate entities, and important tax considerations. Whether you're a startup founder focused on scaling or a small business owner trying to derive optimal tax benefits, this guide will help you understand if a C corp is the right choice for your business.

What's in this article:

• What is a C corp?
  
• How C corporations work
  
• What are the benefits and drawbacks of C corps?
  
• S corp vs. C corp: What's the difference?
  
• C corp vs. LLC: What's the difference?
  
• What to know about C-corp taxes
  
• What types of businesses should form a C corp?
  
• How to create a C corp
  
• How Stripe Atlas can help
  

What is a C corp?

A C corp is one type of legal business structure in the US. It is considered to be a separate legal entity from its owners or shareholders, meaning it can enter into contracts, own assets, be sued, and incur liabilities in its own name. This feature provides limited liability protection for the corporation's shareholders, who are typically not personally liable for the debts and obligations of the corporation.

How C corporations work

Because C corps are legal business structures that are separate entities from their owners or shareholders, they are subject to certain legal requirements. These requirements include filing articles of incorporation with the state in which they are located, electing a board of directors, and holding annual meetings.

C corps issue shares of stock to raise capital, which can be publicly traded on a stock exchange. Shareholders invest in the corporation and own a portion of the company proportional to their number of shares. A board of directors oversees the management of the corporation and hires officers to run day-to-day operations.

A C corp is a popular business structure for large or growing companies that want to raise capital through public offerings of stock, have complex ownership structures, or plan to reinvest profits in the business rather than distributing them to shareholders. C corps have what is referred to as "perpetual existence", meaning that they can continue to exist even if their owners or shareholders leave the company or die.

Limited liability

One of the key aspects of C corps is their limited liability protection: they are considered separate legal entities from their owners or shareholders. The corporation can enter into contracts, own assets, and incur liabilities in its own name, while shareholders will mostly be protected from liability related to the company's debts and obligations.

For example, if a C corp is sued for breach of contract, the plaintiff can collect damages from the corporation's assets only, not from the personal assets of the shareholders. If the shareholders have invested in the company, they do bear some liability – which corresponds to the amount of their investment – but typically their other assets are safe. If the company is sued or fails for any reason, shareholders may lose their investment, but the legal structure protects their personal assets.

This protection from personal liability makes C corps a popular choice for businesses that plan to raise capital by issuing shares of stock, since investors are often more willing to invest in a corporation with limited liability protection.

Liability exceptions

Limited liability protection does not apply in all situations. C corps offer a valuable shield against personal liability for shareholders, which is especially important in high-risk industries, but these protections have limits.

To ensure that limited liability protection remains in place, shareholders should maintain proper corporate formalities and avoid misconduct or illegal activity. Shareholders may still be personally liable for their own actions or misconduct while operating the business. In some cases, courts may decide to hold shareholders personally liable for the corporation's debts or obligations if they fail to maintain proper corporate formalities or engage in fraud or illegal activity.

One situation in which a C-corp shareholder might be personally liable is if the shareholder personally guarantees a loan or debt of the corporation. For instance, imagine that a C corp takes out a loan from a bank to purchase new equipment, and a shareholder agrees to personally guarantee the loan. If the corporation defaults on the loan and is unable to pay it back, the bank may then seek repayment from the shareholder. In this case, the shareholder is personally liable for the debt, regardless of the limited-liability protection provided by the C corp.

Another situation is a shareholder engaging in wrongful conduct or illegal activity while operating the business. For example, if a shareholder of a C corp engages in fraud, embezzlement, or other illegal activities, they may be personally liable for any damages or losses incurred by the corporation or its stakeholders.

What are the benefits and drawbacks of C corps?

C corps are a popular choice for large or growing companies that want to raise capital through public offerings of stock, have complex ownership structures, or plan to reinvest profits in the business rather than distribute them to shareholders.

Here are some of the main benefits that come with incorporating as a C corp:

• Limited-liability protection
  C corps provide limited-liability protection to their shareholders, which means that the shareholders are typically not personally liable for the debts and obligations of the corporation.

• Access to capital
  C corps can raise capital by issuing an unlimited number of shares of stock, which can be publicly traded on a stock exchange. This can make it easier for the company to attract investors and raise money.

• Perpetual existence
  C corps have perpetual existence, which means that the corporation can continue to exist even if the owners or shareholders leave the company or die.

• Separation of ownership and management
  C corps have a board of directors that oversees the management of the corporation, which can provide a clear separation of ownership and management.

Some qualities of C corps could be considered drawbacks, including:

• Double taxation
  C corps are subject to double taxation, which means that the corporation's profits are taxed at the corporate level, and then the shareholders are taxed on any dividends or distributions that they receive from the corporation.

• More formalities
  C corps are subject to more formalities – such as holding annual meetings and keeping detailed records of corporate activities – than other business structures.

• More expensive to form and maintain
  C corps can be more expensive to form and maintain than other business structures, such as LLCs or sole proprietorships.

• Less flexible ownership structure
  C corps are limited to one class of stock, which can limit the flexibility of the ownership structure.

The pros and cons of the C corp structure will impact the daily operations and growth potential of businesses in different ways. This is why there isn't a universally accepted set of recommendations for how to choose a corporate structure. The best option will be one that maximises benefits and minimises drawbacks for the specific business in question.

S corp vs. C corp: What's the difference?

S corporations (S corps) and C corps are two different types of legal business structures. Each structure comes with its own advantages and disadvantages for businesses.

Here are key differences between the two business structures:

• Taxation
  C corps are subject to double taxation, which means that the corporation's profits are taxed at the corporate level first, and then shareholders are taxed on any dividends or distributions that they receive from the corporation. S corps are not subject to double taxation, and their profits and losses are passed through to their shareholders and taxed at individual tax rates.

• Shareholders
  C corps can have an unlimited number of shareholders, and those shareholders can be individuals, corporations or other entities. S corps are limited to 100 shareholders, who must be individuals or certain types of trusts.

• Ownership
  C corps can have different classes of stock, which come with different voting rights or dividend preferences. S corps, however, can only have one class of stock, with each share holding equal voting rights and receiving equal dividends.

• Formalities
  Generally, C corps are subject to more formalities than S corps. These formalities can include holding annual meetings and keeping detailed accounting of corporate activities.

Here are similarities between S corps and C corps:

• Limited liability
  Both S corps and C corps provide limited-liability protection to their shareholders, meaning that shareholders are generally not personally liable for the debts and obligations of the corporation.

• Legal entity
  Both S corps and C corps are legal entities that are separate from their owners and shareholders, meaning that the business itself can enter into contracts, sue or be sued, and own assets in its own name.

• Formation
  Both S corps and C corps are formed through the filing of articles of incorporation with the state in which they are located.

The choice between forming an S corp or a C corp will depend on the specific needs and goals of the business, including tax considerations, number and types of shareholders, and desired ownership structure. There's no one right answer or single set of rules to follow. It's a good idea to consult with a lawyer or tax professional to determine which type of corporation is best suited for your business.

C corp vs. LLC: What’s the difference?

C corps and LLCs share the same basic similarities as C corps and S corps: they both offer limited liability to owners and members, establish the business as its own legal entity, and must be formed by filing articles of incorporation or organizational documents in the state where they’re located.

Despite these similarities, there are important distinctions between C corps and LLCs, which translate into meaningful differences for the people who own and operate them. Here’s an overview of the key differences between C corps and LLCs:

Taxation

C corps are subject to double taxation, meaning that the corporation’s profits are taxed at the corporate level first, then the shareholders are taxed on any dividends or distributions they receive from the corporation. LLCs, however, are not taxed at the entity level. Instead, their profits and losses are passed through to their owners or members and taxed at individual tax rates.

Ownership

C corps have a more formal ownership structure than LLCs. C corps are owned by shareholders, who own shares of stock in the company—shares that can be bought and sold on public or private markets. The shareholders elect a board of directors to oversee the management of the company and appoint officers, who run day-to-day business operations.

LLCs, on the other hand, are owned by members, who have an ownership interest in the company that is often expressed as a percentage of ownership in the LLC. Members can be individuals or other companies, and they have the right to participate in the management of the company unless otherwise stated in the operating agreement. LLCs can have a single member or multiple members, and do not issue stock.

Formalities

Typically, C corps are subject to more formalities than LLCs. These can include holding annual meetings, electing directors, and keeping detailed records of corporate activities. LLCs have fewer formalities than C corps, although tax professionals recommend creating an operating agreement that outlines the company’s management and ownership structure.

Liability protection

C corps provide limited liability protection to their shareholders, meaning that personal assets are protected from the debts and obligations of the corporation—although this liability is limited to the amount of the shareholder’s investment in the company. This protection applies to the corporation’s debts and obligations only, not the actions or debts of individual shareholders or officers of the company, and shareholders may still be personally liable for any misconduct or wrongdoing they engage in while operating the business.

LLCs also provide limited liability protection to their owners or members, which means that personal assets are protected from the debts and obligations of the company. Members are only liable to the extent of their investment in the company. However, similar to C corps, an LLC’s members may be personally liable for any misconduct or wrongdoing they engage in while operating the business.

What to know about C-corp taxes

For entrepreneurs and businesses considering this legal structure, it's important to understand the tax implications.

One important feature of C corps is the liability protection for shareholders, which can help protect personal assets. However, this protection comes at a cost: C corps are subject to double taxation, which means that the corporation's profits are taxed at the corporate level, and then shareholders are taxed on any dividends or distributions that they receive from the corporation. This can make C corps less tax efficient than other business structures, such as S corps or LLCs.

C corps are subject to a flat corporate tax rate, which is currently set at 21% for tax years beginning after 31 December 2017. This rate is generally lower than individual tax rates, which can be as high as 37%. C corps can deduct ordinary and necessary business expenses, such as salaries, rent, and advertising, from their taxable income.

One advantage of C corps is that they can carry over net operating losses from previous years to offset future profits, which can help reduce their tax liability. However, C corps may also be subject to alternative minimum tax, which is a separate tax system that limits the use of certain deductions and credits.

C corps must make estimated tax payments throughout the year, based on their expected taxable income. They must also file an annual tax return, Form 1120, with the IRS. C corps must file state and local tax returns and may be subject to additional taxes and fees, depending on their location and business activities.

What types of businesses should form a C corp?

It's important for businesses to understand when a C corp structure is the best choice. While forming a C corp carries many advantages for some businesses, a small, family-run business or a freelance consultant might not want to handle the additional administrative burdens. The choice depends on the nature of your business and how you want to operate in the future.

With that in mind, here are some indicators that a C corp might be right for your business:

• If you plan to grow the business rapidly
  Companies with an ambitious growth plan, especially those hoping to go public eventually, can benefit from the C corp's lack of restrictions on the number of shareholders.

• If you plan to seek institutional investors
  A C corp is often a non-negotiable structure for many institutional investors in certain industries such as technology or biopharma.

• If you need ownership flexibility
  Businesses that need different classes of stock, which enable varying levels of control and dividend rights, will prefer C corp structures.

• If you want to offer competitive employee benefits
  For companies that want to attract top talent with stock options, employee stock purchase plans or robust health and retirement benefits, the C corp provides the most tax-advantageous structure.

• If you want long-term stability
  Perpetual existence means that C corps are not disrupted by changes in ownership or the death of shareholders. This stability appeals to businesses aiming for long-term continuity.

• If you operate in multiple states
  Businesses that operate in several states might find it simpler to comply with interstate regulations as a C corp, given its wide recognition and consistent treatment.

The selection of a corporate structure requires a deep understanding of your business goals, industry norms and growth projections. Under the right conditions, a C corp is a strong choice, but it's not ideal for every business. Before committing to a corporate structure, undergo a rigorous evaluation and solicit legal and financial advice from trusted parties who are deeply familiar with your jurisdiction and specific business.

How to create a C corp

Creating a C corporation is a popular choice for entrepreneurs and business owners who want to protect themselves from personal liability while also raising capital through the issuance of stock shares.

Here are the basic steps to create a C corp:

1. Choose a name
Choosing the right name for your corporation is an important first step. Your name should be unique and not already in use by another business in your state. Check with your state's secretary of state office to make sure the name you want is available.

2. File articles of incorporation
Once you've chosen a name, you'll need to file articles of incorporation with your state's secretary of state office. This is a legal document that establishes the existence of your corporation. The articles should include the name and address of the corporation, the number and type of shares of stock, the purpose of the corporation, and the names and addresses of the initial directors.

3. Hold an organisational meeting
After you have filed your articles of incorporation and the secretary of state has approved them, hold an organisational meeting with the board of directors. At this meeting, you'll adopt by-laws, elect officers, and issue shares of stock. By-laws are the rules and procedures that govern how your corporation will be run, such as how often meetings will take place and how decisions will be made. The officers will be responsible for running the day-to-day operations of your corporation while the board of directors will oversee their work.

4. Obtain business licenses and permits
Depending on your industry and location, you may need to obtain business licences and permits from your state and local government. These could include business licences, zoning permits, or health and safety permits. Check with your state and local government to determine which requirements apply to your business.

5. Get a tax identification number
Your corporation will need to get a tax identification number (TIN) from the IRS. You will use this number to file taxes and open a business bank account. You can obtain a TIN by filing Form SS-4 with the IRS.

6. Register for state taxes
Register for state taxes with your state's tax agency. This can include sales tax, use tax, and unemployment tax. Check with your state's tax agency to determine which requirements apply to your business.

7. File annual reports
Once your corporation is established, file annual reports with your state's secretary of state office. These reports will update the state on the status of your corporation, including changes to your officers, directors, and shareholders. You'll also need to pay any necessary fees associated with the annual report.

8. Comply with ongoing requirements
Compliance is important to maintain the legal status of your corporation. This can include holding annual meetings, maintaining corporate records, and following all state and federal laws and regulations. Consider working with a qualified attorney or accountant when forming a C corp, to ensure you meet all legal and tax requirements.

When it's the right fit, a C corp can provide significant benefits to entrepreneurs and businesses. By following these steps, and working with a qualified professional when necessary, you can establish a secure legal foundation for your corporation and protect yourself from personal liability.

How Stripe Atlas can help

Stripe Atlas sets up your company's legal foundations so you can fundraise, open a bank account and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You'll choose your company structure, instantly confirm whether your company name is available and add up to four co-founders. You'll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers and then e-sign all your documents. Any co-founders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your EIN. Founders with a US Social Security number, address and mobile phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at US$100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal Income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in your Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance and operations from industry leaders like AWS, Carta and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you'll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

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