C corporation
A corporation that pays its own 21% tax, with owners taxed again on dividends. Northwind is one.
A C corporation is a corporation that pays its own income tax: 21% of taxable income, on Form 1120, every year. Every corporation is one unless it elects S status. Its owners hold stock, and they are taxed a second time when it pays them a dividend. That is double taxation.
Northwind is one. The founders bought stock for $60,000, and the board declared a $500 dividend on September 30 — the double tax in miniature: Northwind gets no deduction for it, and the founders report it as dividend income.
The founders pay $60,000 into the company's bank account for their shares.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 60,000.00 | |
| 3000Common stock | 60,000.00 | |
| Balanced | 60,000.00 | 60,000.00 |
The board declares a $500 dividend to the founders, payable on October 15.
| Account | Debit | Credit |
|---|---|---|
| 3200Dividends | 500.00 | |
| 2500Dividends payable | 500.00 | |
| Balanced | 500.00 | 500.00 |
Northwind's equity entries: stock issued, and a dividend declared.
C corporation
- Good at
- Any number and kind of shareholders, and any classes of stock — preferred included.
- Stock options, including incentive stock options.
- The only entity whose stock can be qualified small business stock.
- Losses carry forward as net operating losses against future profit.
- Watch for
- Double taxation of profit paid out — 32.85% combined in this track's illustration.
- Losses stay inside the company; owners can't deduct them.
- A corporate return every year, loss or not, and state franchise taxes.
- Best for
- Anything raising venture capital, granting options, or planning to be sold or go public.
Why most venture-backed startups choose exactly this has its own lesson: why startups are Delaware C corporations. Keeping one in good standing — Form 1120, estimated tax, Delaware's franchise tax — is the Compliance & tax track.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §11(b) (opens in a new tab)Tax imposed on corporationsFree to read
- IRS guidance
- IRS, Forming a corporation (opens in a new tab)Corporations — the double taxFree to read
- Official form
- Form 1120 (opens in a new tab)U.S. Corporation Income Tax Return (PDF)PDF · Free to read
- Background reading — not an authority
- Wikipedia, “C corporation” (opens in a new tab)C corporationFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- C corporationA corporation taxed as a taxpayer in its own right: it files Form 1120 and pays 21% of its taxable income, and its shareholders are taxed again on what it pays them as dividends. Every corporation is a C corporation unless it elects S status
- Double taxationA C corporation's profit taxed to the corporation when earned and again to its shareholders when paid out as dividends. The corporation gets no deduction for the dividend, and shareholders cannot deduct its losses
- DividendA distribution of earnings to shareholders, declared by the board — a liability from the declaration date and a reduction of retained earnings, never an expense
- Form 1120The federal income tax return of a domestic C corporation, filed every year whether or not it has taxable income — due the 15th day of the 4th month after year end, April 15 for a calendar year, with tax at 21% of taxable income under IRC §11(b)
See also
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- Journal entry for dividendsWhen dividends are declared, debit Dividends declared (or Retained earnings) and credit Dividends payable. When paid, debit Dividends payable and credit Cash. At year-end, close Dividends declared to Retained earnings.
- Journal entry for an income tax provisionAt period-end, debit Income tax expense for the total provision, credit Income taxes payable for current tax, and credit (or debit) the Deferred tax asset for the change in deferred tax, such as a net operating loss carryforward used this year.
- Form 1120The federal income tax return for a C corporation. It's due on the 15th day of the fourth month after year end, so April 15 for a calendar-year company; Form 7004 extends the filing, not the payment, by six months.
- Net operating lossA tax loss: deductions larger than income for the year. A federal loss from a tax year beginning after 2017 carries forward with no expiry and can offset up to 80% of taxable income in a later year.