Financial Glossary
C Corporation (C Corp)
A C Corporation (C Corp) is a business entity formed under state law that is recognized as a separate legal person, capable of entering contracts, owning assets, and incurring liabilities independent of its shareholders. C Corps are subject to entity-level corporate income tax on profits. When after-tax profits are distributed to shareholders as dividends, those dividends are taxed again at the shareholder level -- the double taxation characteristic most associated with C Corp structure. In exchange, C Corps offer unlimited shareholder capacity, multiple classes of stock (essential for VC preferred share structures), no passive activity loss restrictions, and no eligibility limitations based on shareholder count or residency.
Problem & Application
A startup seeking venture capital investment is typically required to be a Delaware C Corp because venture funds need preferred equity with liquidation preferences, anti-dilution provisions, and board representation rights -- features that S corporation and LLC structures cannot accommodate cleanly. The double-taxation drawback matters less at the startup stage when the company reinvests all profits and pays no dividends; the corporate tax only bites when the company becomes profitable and begins distributing earnings. For owner-operated businesses that generate significant annual profit and distribute it, a C Corp structure is usually disadvantageous relative to S Corp or LLC pass-through treatment. A tax advisor evaluating entity structure compares effective rates under each scenario using the owner's actual income level and distribution plans.
In Short
The C Corp structure is ideal for businesses aiming for significant growth and investment opportunities, though its tax implications and regulatory requirements demand careful planning and management.