Legal Definitions - C corporation

A C corporation is a specific legal structure for a business, primarily defined by its tax treatment under U.S. federal law (specifically, Subchapter C of the Internal Revenue Code). It is a distinct legal entity separate from its owners, known as shareholders.

This separation means the corporation itself can enter into contracts, own assets, incur debts, and be sued, all independently of its owners. A significant benefit of this structure is limited liability for shareholders, meaning their personal assets are generally protected from the corporation's debts and legal obligations. Shareholders own the corporation by purchasing shares of its stock, and they are entitled to receive dividends if the company distributes profits, and a share of any remaining assets if the company liquidates after all creditors are paid.

The defining characteristic of a C corporation from a tax perspective is "double taxation." This occurs because the corporation first pays income tax on its profits at the corporate level. Then, if any of the remaining profits are distributed to shareholders as dividends, those shareholders must pay personal income tax on those dividends. C corporations are the most common form of corporate organization, especially for larger businesses or those planning to raise significant capital from many investors.

• Example 1: A Major Retail Chain
  Imagine "Global Goods Inc.," a large retail company with stores across the country, publicly traded on a stock exchange. Global Goods Inc. is structured as a C corporation. Millions of individuals and institutions own shares in Global Goods Inc. If the company faces a lawsuit due to a product defect or incurs significant debt to expand its operations, the personal assets of its shareholders (like their homes or savings accounts) are protected. The company itself, as a separate legal entity, is responsible for these liabilities. Furthermore, Global Goods Inc. pays corporate income tax on its annual profits, and then any dividends it distributes to its shareholders are taxed again as personal income for those shareholders.
• Example 2: A Growing Tech Startup
  Consider "Innovate Solutions," a rapidly expanding technology startup that has received investments from multiple venture capital firms and angel investors. Innovate Solutions is set up as a C corporation. This structure allows it to easily issue new shares to attract more investors and raise substantial capital for research and development. The investors, as shareholders, benefit from limited liability, meaning their personal wealth is not at risk if Innovate Solutions' ambitious projects fail or if the company faces legal challenges. The company's profits are taxed at the corporate level, and if it eventually pays out dividends to its investors, those dividends will be taxed again at the individual investor level.
• Example 3: A Family-Owned Manufacturing Business
  "Precision Parts Co." is a long-standing manufacturing business, initially founded by a family but now employing hundreds of people and planning for future expansion and possibly going public. By operating as a C corporation, Precision Parts Co. maintains a clear legal separation between the business and the personal finances of the founding family members who are shareholders. This protects the family's personal assets from any business debts or liabilities, such as a large loan taken out for a new factory or a product liability claim. The company's earnings are subject to corporate income tax, and if the family members receive dividends from the company's profits, they will pay personal income tax on those distributions.