When to Form a C-Corporation

Unlike LLCs and S-Corporations, which are flow-through entities, C-Corporations are taxed at the entity-level at a rate of 21%. This means that income earned by C-Corporations is taxed twice—once when earned by the corporation, and a second time when distributed to shareholders as dividends. In order to avoid this double taxation, it is often tax-favorable to form an LLC or S-Corporation. 

However, with LLCs and S-Corporations, all income flows through each year to the owners and is subject to tax at the owners’ tax rates. Whereas with a C-Corporation, there is no flow-through treatment, so after the 21% entity level tax, income is only taxed upon receipt. 

Thus, it can make sense to form a C-Corporation when flow-through treatment is not ideal for your business operations. If the business intends on keeping a lot of earnings in the entity, C-Corporations can be ideal. The income will be subject to tax at 21%, but owners will not have to pay additional tax for as long as the income is held in the corporation, because tax is only paid when income is distributed out of the corporation.  

Clients who are looking to expand their business and attract investors are also interested in structuring as a C-Corporation, because investors do not like flow-through taxation. Investors often want to passively invest in the business, only paying income tax when income is received. With an LLC or an S-Corporation, investors are forced to pay tax each year on their distributive share of income, whether or not that income was taken out of the business. Thus, flow-through structures can deter investors from participating, and a corporate structure is often ideal for a business seeking substantial investment. 

In addition, S-Corporations have restrictions, such as requirements that all shareholders be based in the US and there not be more than 100 shareholders. Because of these restrictions, it often makes more sense to be taxed as a C-Corporation if you are looking to have more than 100 investors and/or international investors.