C-Corp Formation: Who It's For and How to Set It Up

What Is a C-Corporation?

A C-Corporation (C-Corp) is a business entity that is legally separate from its owners. It can own property, enter contracts, sue and be sued, and pay taxes — all in its own name. When people say "corporation" without any qualifier, they typically mean a C-Corp.

C-Corps are the structure used by publicly traded companies, venture-backed startups, and large enterprises. They are also the most complex and heavily regulated business structure available.

Who Actually Needs a C-Corp?

Let us be direct: most small businesses do not need a C-Corp. The C-Corp makes sense in specific situations:

You plan to raise venture capital or institutional investment. VCs and institutional investors strongly prefer (and often require) C-Corp structure because of the flexibility in issuing different classes of stock.
You plan to go public someday. Public companies are C-Corps.
You want to retain significant earnings in the business. The flat 21% corporate tax rate is lower than most individual rates, so businesses that reinvest heavily can benefit.
You plan to offer stock options to employees. C-Corps have the most flexible equity compensation tools, including Incentive Stock Options (ISOs) that get favorable tax treatment.
You have or will have foreign shareholders. S-Corps cannot have non-U.S. shareholders. C-Corps can.

If none of those apply to you — if you are a contractor, consultant, or service business that distributes most of its profits to the owners — an LLC with S-Corp election is almost certainly a better choice.

The Double Taxation Problem

The defining characteristic of C-Corp taxation is double taxation:

The corporation pays corporate income tax on its profits at a flat 21% rate.
When those after-tax profits are distributed to shareholders as dividends, the shareholders pay tax again — qualified dividends are taxed at 0%, 15%, or 20% depending on income.

Example: Your C-Corp earns $100,000 in profit.

Corporate tax: $21,000 (21%)
After-tax profit available for distribution: $79,000
If you take it all as dividends at the 15% rate: $11,850 in dividend tax
Total tax: $32,850 on $100,000 of profit — an effective rate of 32.85%

Compare that to an S-Corp where $100,000 passes through to your personal return and is taxed once. For most small business owners, the S-Corp wins.

Strategies to Minimize Double Taxation

C-Corp owners have several legitimate strategies to reduce the double taxation burden:

Pay yourself a salary. Salaries are tax-deductible to the corporation, reducing corporate taxable income. But the salary must be reasonable — not inflated to zero out corporate income.

Provide benefits. C-Corps can deduct the cost of health insurance, retirement plan contributions, and other fringe benefits for owner-employees. Some of these benefits are more tax-advantaged in a C-Corp than in other structures.

Retain earnings. If the business needs capital for growth, keeping profits in the company and paying the 21% corporate rate may be cheaper than distributing them and paying both levels of tax.

Invest in qualified small business stock (QSBS). Under Section 1202 of the tax code, shareholders of qualifying C-Corps may be able to exclude up to $10 million in capital gains when they sell their stock, provided certain conditions are met.

How to Form a C-Corporation

Step 1: Choose Your State of Incorporation

Most small C-Corps should incorporate in their home state. Delaware is popular for venture-backed companies because of its well-developed corporate law and business-friendly Court of Chancery. But if you do not need those specific benefits, incorporating at home avoids the cost of registering as a foreign corporation.

Step 2: Choose a Corporate Name

The name must include "Corporation," "Incorporated," "Company," or an abbreviation. Search your state's database and the USPTO trademark database before committing.

Step 3: File Articles of Incorporation

File with your state's Secretary of State. The articles typically include:

Corporate name
Number and type of authorized shares
Registered agent name and address
Incorporator name and address
Corporate purpose (most states allow a general purpose statement)

Step 4: Create Corporate Bylaws

Bylaws are the internal rules governing the corporation. They cover meeting procedures, voting requirements, officer roles, and more. They do not get filed with the state but must be adopted by the board of directors.

Step 5: Hold an Organizational Meeting

The initial board of directors holds a meeting to formally adopt bylaws, elect officers, authorize the issuance of stock, and handle other organizational matters. Document everything in written minutes.

Step 6: Issue Stock

Issue stock certificates to the initial shareholders. Even if you are the only shareholder, formally issue the stock and record it in a stock ledger. This establishes the ownership structure and is critical for maintaining the corporation as a legitimate separate entity.

Step 7: Get Your EIN and Open a Bank Account

Apply for an EIN from the IRS and open a corporate bank account. Never comingle corporate and personal funds.

Ongoing Corporate Formalities

C-Corps have the heaviest compliance burden of any business structure:

Annual shareholder meetings with documented minutes
Board of directors meetings (at least annually)
Annual reports filed with the state
Corporate tax returns (Form 1120) — due on April 15
Quarterly estimated tax payments
Maintaining corporate records — bylaws, minutes, stock ledger, resolutions

Failing to observe these formalities can result in courts "piercing the corporate veil" and holding shareholders personally liable — exactly the outcome you formed the corporation to avoid.

C-Corp vs. S-Corp: A Quick Comparison

| Feature | C-Corp | S-Corp | |---------|--------|--------| | Taxation | Double (corporate + dividend) | Pass-through (single) | | Corporate tax rate | Flat 21% | N/A — income taxed at personal rates | | Shareholder limits | Unlimited | 100 maximum | | Stock classes | Multiple allowed | One class only | | Foreign shareholders | Allowed | Not allowed | | VC/institutional investment | Preferred | Difficult | | Complexity | High | Moderate |

Bottom Line

The C-Corp is a powerful structure, but it is overkill for most small businesses. If you are not raising venture capital, planning an IPO, or retaining substantial earnings at the corporate level, the double taxation and compliance overhead are not worth it. For the vast majority of contractors and service business owners, an LLC with an S-Corp election provides better tax efficiency with less hassle.