A C corporation is a corporation that is taxed separately from its owners under Subchapter C of Chapter 1 of the Internal Revenue Code. The term is used to distinguish a C corporation from an S corporation, which is not taxed separately its owners.
For tax purposes, corporations are classified as C corporations by default. Any business entity organized under a Federal or State statute that describes or refers to the entity as a corporation is treated as a C corporation for Federal tax purposes. Certain unincorporated entities—such as publicly-traded partnerships, insurance companies, certain state-chartered banks, and government-owned businesses—are also automatically classified as corporations.
Double Taxation: Separate vs. Pass-Through Treatment
The Federal tax rules governing C corporations are designed to ensure that all income is taxed twice: once at the corporate level and again when distributions are made to shareholders. While this double tax can be mitigated if the corporation reinvests all profits into the business and does not pay out dividends, the shareholders will eventually be taxed on the earnings when the corporation is liquidated. A reinvestment strategy can also make it difficult to raise capital if, as in many cases, the investors expect return on their investment in the form of dividends. The double taxation inherent in C corporations makes them unattractive in most small business situations.
Restrictions on Ownership
Unlike S corporations, there are no restrictions on ownership of C corporations. C corporation stock may be owned by individuals (including U.S. citizens, resident aliens, and nonresident aliens), partnerships, LLCs, any type of trust, and other corporations. A C corporation can have an unlimited number of shareholders.
Restrictions on Capital Structure
Unlike S corporations, C corporations can have more than one class of stock. This allows for differences in voting rights and distributions (including preferred and non-pro rata distributions).
Adjustments to Basis
The basis in stock inherited from a deceased shareholder is stepped up to the fair market value of the stock on the deceased shareholder’s death. But unlike partnerships, corporations cannot adjust the basis of corporate assets after the death of a shareholder.
If the shareholder of a C corporation is also an employee, he or she is treated as any other employee of the corporation. Compensation paid to the shareholder-employee is subject to payroll tax withholding. Other distributions are generally treated as taxable dividends.
Shareholders of C corporations may also be employees, allowing them to take advantage of all nontaxable fringe benefits that are only available to employees.
State-Level Franchise Tax Issues
Although a full discussion of state law tax consequences of choice of entity is beyond the scope of this guide, capital-based franchise taxes should be given careful consideration when choosing a corporate entity. In many states, corporations are subject to franchise tax, making the corporate form more costly than other alternatives, such as limited liability companies. Consideration of this issue at the time of formation can prevent detrimental tax consequences that could arise if the organization later decides to convert to limited liability company status.
 Treas. Reg. § 301.77-1-2(b)(1), (3).
 I.R.C. § 1014.