C Corporation Law & Legal Definition

This type of general, for-profit corporation is referred to as a “C” corporation (referring to Chapter C in the IRS code). "C Corporation" merely refers to a regular, state-formed corporation. A corporation is owned by shareholders and is managed and controlled by the board of directors who elect the president and are responsible for the management and policy decisions of the corporation. The dealings of the corporation are carried out by the officers and employees of the corporation under the authority delegated by the directors of the corporation. To be incorporated an Incorporator must draft legal documents and, file the documents with the appropriate government agency, usually the Secretary of State, and pay the required fees. In order to maintain corporate status, certain formalities must be observed, such as annual meetings must be held, corporate minutes of the meetings must be taken, officers must be appointed, and shares must be issued to shareholders. The corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any foreseeable business debts.

Some reasons to choose this business structure include:

  • Your business is so profitable that you can save significant income tax dollars by keeping some profits in the corporation each year. This strategy is called "income splitting" because profits are essentially split between the individual owners and the corporation itself.
  • You own a family business and you want to begin making gifts of ownership to your family as part of your financial or estate plan or to plan for the next generation of owners. With a corporation it is possible to make gifts of shares in your company without necessarily giving up management control and without paying gift tax.
  • Others insist that you incorporate your business.


Forming a corporation in the home state is the easiest route, but incorporation may be chosen in another state. In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.

The shareholdes must agree on the following to create a corporation:

  • The name of the business.
  • The total number of shares of stock the corporation can sell or issue (known as "authorized shares").
  • The number of shares of stock each of the owners will buy.
  • The business in which the corporation will engage.

The shareholders must then prepare and file articles of incorporation or a certificate of incorporation with the corporate office of the state in which they want to incorporate. Most states charge an initial fee for filing the corporate documents and an annual fee for allowing the corporation to continue. These fees are sometimes based upon the number of shares of stock authorized and the par value of the stock. Each state has its own rules and schedule of fees.

State rules on naming corporations vary, but generally:


Your state's corporations office can tell you how to check if your proposed name is available for your use. Often, for a small fee, you can reserve your corporate name for a short period of time until you file your articles of incorporation. Incorporation will not protect you from another company or corporation using your name. It will prevent another business from incorporating using the same name or a name that could confuse the identity of the two separate companies, but it is the responsibility of the corporation to protect its good name and reputation. It is common practice to register a trade name as a service mark or trademark in order to protect the name from being used in your line of business.


  • set the corporation's fiscal or accounting year
  • appoint corporate officers
  • adopt the corporate bylaws
  • authorize the issuance of shares of stock, and
  • adopt an official stock certificate form and corporate seal.


Although a corporation is not a "citizen" under the privileges and immunities clause of the Fourteenth Amendment to the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons, such as the right to due process and equal protection, free speech, and the right to be represented by an attorney. However, because a corporation faces no risk of incarceration, it has no right to appointed counsel if it cannot afford to retain private counsel.

Because the corporation is a legal entity separate from its owners, it will need a separate bank account and separate records.

One of the main advantages of the corporate business structure is that the owners/shareholders are shielded from individual liability for the debts of the corporation. However, when corporate formalities are not observed, shareholders may be held personally liable for corporate debts. For example, if an undercapitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil", finding no valid separate corporate exists, and hold the shareholders personally liable for corporate debts.

Also, if the shareholders "guarantee" the obligations of the corporation in order to borrow money or to rent space, for example, then they are legally responsible for the obligations guaranteed. If the shareholders make loans to the corporation and the business fails, their loans may be paid off only after the other loans of the corporation are paid.


The board of directors elect the president and are responsible for the management and policy decisions of the corporation. In a few instances, such as amendment to the articles of incorporation, sale of substantially all of the corporate assets, the merger or dissolution of the corporation, etc., shareholders are required to approve the actions of the board of directors. A corporate director is generally elected by the shareholders. Each director must attend meetings of the board, which must be held no less than once a year. Each director on the board is given one vote; usually the vote of a majority of the directors is sufficient to approve a decision of the board. Directors must make sure that major corporate actions are clearly written and were taken behalf of the corporation. Directors may be paid for their services, although payment is not required. Directors have a fiduciary responsibility to the shareholders to keep their best interests in mind.


Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the followinga President, Vice-President, Secretary, and Treasurer. Terms of directors often are for more than one year and are staggered to provide continuity. Shareholders can elect themselves to be on the board of directors.


A corporation’s Articles of Incorporation are the documents filed with the state office that brings the company into legal existence. Once the documents are filed the corporation is a legal entity. Each state has its own requirements regarding the contents of the articles of incorporation. Most states do not require publication of a notice of incorporation. An exception may be if an unincorporated business is incorporating but it will keep the same name.

Articles of incorporation contain:

  • the name of your corporation
  • the corporation's address
  • a "registered agent" (the person to be contacted by any member of the public who needs to speak to someone about the corporation, accepts official documents on behalf of the corporation), and
  • in some states, the names of the corporation's directors.



The bylaws of a corporation are the internal rules and guidelines for the day-to-day operation of a corporation, such as when and where the corporation will hold directors' and shareholders' meetings and what the shareholders' and directors' voting requirements are. Typically, the bylaws are adopted by the corporation's directors at their first board meeting. They may specify the rights and duties of the officers, shareholders and directors. They may also specify how the company may enter into contracts, transfer shares, hold meetings, pay dividends and make amendments to corporate documents. They may specify a fiscal year, how the corporate seal is to be used and which offices are required. Most states do not require bylaws to be filed with the state office.



Shares may either be common or preferred shares. “Par value” is the minimum price for which each share may be sold. For a company with shares of “no par value,” the board of directors sets the minimum value for which a share may be sold. The sale of shares raises capital for the corporation, allowing corporate funds to remain separate from individual shareholders’ or directors’ funds. There is no minimum number of shares that must be issued but a company may only issue the maximum number of shares approved in the articles of incorporation or as amended.

A dividend must be paid equally to all shares of common stock and is usually expressed as an amount per share, such as "$5 per share." The board of directors decides whether dividends shall be paid. If dividends are not allowed in any given period, a shareholder has no right to any of the money the corporation's business has made (except as an employee receiving a salary or wages).



Most states have enacted their own versions of this federal exemption.


A corporation is a separate legal and tax entity from the owners. A corporation pays taxes at its own corporate income tax rates and files its own corporate tax forms each year (IRS Form 1120). The “EIN” (also called tax ID number) is assigned to corporations for taxation purposes. The Federal Tax I.D. number of a corporation is the equivalent of the social security number of an individual . An EIN is needed to open a bank account and establish corporate credit.


Dividends paid to shareholders by the corporation are taxed to each shareholder individually. This is why there is said to be a "double tax" on corporations. Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate. However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and avoid double taxation.


As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.


  • A corporation's life is not dependent upon its members. A corporation possesses the feature of unlimited life. If an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
  • Ownership of a corporation is easily transferable.
  • A corporation possesses centralized management.

Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.


The primary disadvantage to a corporation is double taxation. Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder. All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax. Further, the double tax can be eliminated by making an S corporation election.

Other disadvantages:

  • There is more complexity and expense with forming a corporation.
  • There are more extensive record keeping requirements.Corporations must observe corporate formalities such as holding (and taking minutes of) annual shareholder and director meetings and documenting important directors' decisions. Also, corporations must file and pay taxes on a separate corporate tax return and must set up a double-entry bookkeeping system to record business transactions, complete with daily journals and a general ledger.
  • Operating a corporation across state lines often requires the corporation to qualify to do business in the other state.

Additional Definitions

C Corporation




Limited Liability


Raising Capital


Attracting Top-Notch Employees


Fringe Benefits


Continuance of Existence



Double Taxation


Bureaucracy and Expense


Rules Governing Dividend Distribution



















SEE ALSO Incorporation; S Corporation









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                                   updated by Magee, ECDI