A C corporation gets its name from the subchapter of the Internal Revenue Code that determines how it is taxed. For both tax purposes and for the liability protection from business creditors that a distinct legal entity provides, C corporations have historically been one of the predominant forms of taking businesses beyond the start-up stage.

A C corporation is a legal entity—separate from its owners or shareholders—created through formal filing procedures under the laws of the state where the company is domiciled (generally its primary place of doing business). A corporation can own property, enter into contracts and pursue business activities. The separation of a corporation from its owners has implications for the life span, liability and taxation of a corporation.

State laws specify formalities in order to form a corporation. At minimum, articles of incorporation must be filed with the secretary of state. In some states, the articles must also be recorded with the register of deeds in the county in which the corporation is located.

Because a corporation is a separate legal entity, it has a "perpetual life"—that is, there is no specific time limit on how long the corporation can exist. Also, there is no relationship between the life of a corporation and the lives of its owners. For example, the death of the sole owner of a corporation does not result in its dissolution.

Shares of stock can easily be transferred in a C corporation during the lifetime of an owner or at the owner's death.

A corporation consists of shareholders and a board of directors. The directors usually employ officers and other employees to oversee the day-to-day operation of the business. In a small business, there is often little distinction between the shareholders, the board and the officers. Frequently, these roles and responsibilities are carried out by the same people.

Because a corporation is a separate legal entity, the corporation is liable for its own debts and other business liabilities. Liability is limited to the assets of the corporation—in other words, the owners of a corporation do not expose their personal assets to corporate liability.

A C corporation is a separate taxable entity. As a result, the corporation pays taxes on its net income. Reasonable salaries are deductible to the corporation and taxable to the employees, including shareholders and employees. Because a C corporation is a taxable entity, the income is exposed to the possibility of double taxation.

One way to avoid double taxation is to retain corporate earnings and profits in the corporation for reinvestment. However, this can potentially lead to higher marginal taxation, and to a penalty tax called the accumulated earnings tax if the earnings retained are beyond the reasonable needs of the business.

C corporations are also potentially subject to an alternative minimum tax.

A C corporation can deduct the cost of employee benefits for non-owner employees. A shareholder can be considered an employee for income tax purposes.

Finally, income can be shifted to family members by making them employees of the corporation. Appreciation can also be shifted to family members as a way to minimize death taxes when an owner dies.

Limited liability of shareholders; perpetual life; departure of a shareholder has no effect on continuity of corporation; ease of transfer; ownership (stock) easily transferred or sold to others; shareholders are able to use all tax-advantaged benefits, such as group health, life, disability and retirement plans.

More difficult to form, operate and terminate; potential for double taxation; potentially subject to accumulated earnings tax and alternative minimum tax.

S corporation, closely-held corporation, professional corporation.