C Corporation

What is a C Corporation?

A C Corporation is a separate legal and tax entity from its owners. It files its own tax return (Form 1120) and pays corporate income tax at a flat 21% rate. When the corporation distributes profits to shareholders as dividends, those dividends are taxed again on the shareholder's personal return — this is "double taxation."

How It's Taxed

The corporation pays tax on its profits at 21%. Shareholders pay tax on dividends received (qualified dividends at 0%/15%/20% rates).

Pros

1. 21% flat rate — lower than the top individual rate (37%) for high-earning businesses that retain profits
2. Unlimited shareholders — can raise capital by issuing stock (no S-Corp 100-shareholder limit)
3. Full fringe benefits — employee health insurance, retirement plans, and other benefits are deductible corporate expenses

Cons

1. Double taxation — profits are taxed at the corporate level and again when distributed as dividends
2. Complexity — must file Form 1120, maintain corporate records, hold annual meetings, issue stock certificates
3. Not typical for small businesses — the compliance costs and double taxation make C-Corps impractical for most freelancers and small business owners

Recommendations

C-Corps are best for businesses that plan to retain significant earnings for growth, raise outside investment (venture capital), or eventually go public. For most self-employed individuals and small businesses, a sole proprietorship, LLC, or S-Corp is more tax-efficient.