Characteristics of a C Corporation The following is a brief explanation of the most important nontax and tax aspects of this kind of business organization. General. A C corporation is a corporate entity (either U.S. or non-U.S.). A U.S. corporation is organized in a single state, although the corporation may do business in many states. Ownership of a corporation is in the form of stock. There is no limit to the number of shareholders that can own a single C corporation. In addition, there is no limit on the number of classes of stock that can be issued. A corporation comes into being when its organizers file articles of incorporation with a state (or country, in the case of a foreign corporation). Assets and liabilities. A corporation owns its assets and is liable for its debts. Shareholders are not liable for corporate debt. The fact that the shareholders are not liable for corporation debt is one of the primary advantages of the corporation as a form of business. Management and employees. The C corporation is managed by its employees, who are hired by the corporation's board of directors. The members of the board of directors are elected by shareholders. The shareholders do not have a right to directly manage the affairs of the C corporation. Instead, they exercise indirect control over the corporation by electing the board, which then appoints corporate managers. Shareholders who provide services to a C corporation are treated either as employees or independent contractors, depending on the specific circumstances, and are taxable on compensation received. When shareholders are employees of a C corporation they are eligible to receive tax-free fringe benefits, such as health care benefits. They can also participate in company-sponsored retirement plans. Taxation of a C corporation. A C corporation is taxable on the income it earns. Shareholders of a C corporation are not directly taxable on this income. A C corporation is the only business form where this is the case. All other forms of business are pass-through entities, where owners are taxed directly on entity-level income. Although shareholders are not taxed directly on corporation income, they can be indirectly taxable on the income. If a C corporation distributes the income in the form of dividends, then the shareholders pay tax. Transfers of assets and liabilities to a C corporation. When a C corporation is formed shareholders contribute cash, property, or services to the corporation in exchange for stock; and sometimes the corporation assumes shareholder liabilities (such as debt to which property is subject). Contributions of property and debt in exchange for stock are usually tax-free; however, there are exceptions. When the corporation assumes debt, and the debt exceeds the basis of property transferred in exchange for stock, then the excess debt triggers gain recognition. In addition, transfers of appreciated property to a corporation in exchange for its stock are tax-free only if the transferors of property own at least 80% of the corporation after the transfer. When stock is received in exchange for services provided to a C corporation, the receipt of stock is usually taxable. Distributions of property to shareholders. Although the transfer of property to a C corporation is tax-free, the distribution of appreciated property by a corporation to a shareholder is usually taxed. When appreciated property is distributed by a C corporation to a shareholder, either as a dividend or as consideration for the repurchase of stock, the corporation ordinarily recognizes gain as if it sold the property to the shareholder; and, the shareholder recognizes gain equal to the excess of the value of the property received over the shareholder's stock basis. Estate planning. The C corporation is a useful device for minimizing estate and gift tax. In general, stock in a C corporation is often valued (for estate and gift tax purposes) at a discount to the value of assets owned by the corporation.