When forming a C corporation, it is important to consider some of its disadvantages, including taxation, complex requirements, and other features. However, the advantages can outweigh the disadvantages if this is the right entity structure for your company. Some of these downsides can be avoided or reduced with proper planning and company management. 


One of the most well-known disadvantages of a C corporation (C corp) structure is how the entity is taxed. The income of the company is taxed when it's earned. Then it is taxed again when it's distributed to shareholders in the form of dividends. Dividends are distributed at the end of each year if the C corporation has leftover profits. These dividends must then be reported on the personal income tax returns of the shareholders. 

How to Avoid Double Taxation

There are ways to avoid this issue of double taxation when running a C corporation. Here are a few options:

  • Take advantage of any deductions and write-offs the IRS allows for corporations, and make sure you don't have profits left at the end of the year.
  • Offer employee benefit plans, such as health plans, which are not taxed on the corporate or the individual level.
  • Salaries are not subjected to the same corporate taxes. Therefore, you can pay owners and employees more. 

The recipients of salaries will need to pay income taxes. However, the company won't pay taxes on income that's distributed in the form of salaries. Therefore, this saves taxation on at least one side. 

Complex Formalities

C corporations have quite a few formal obligations regarding how the corporation is run, plus additional requirements for record-keeping. 

A few of the requirements for C corporations are:

  • Articles of incorporation
  • Bylaws
  • Elected board of directors
  • Annual reports to the state
  • Regular meetings 
  • Public knowledge of the corporate officers.

The articles of incorporation, also called formation documents and articles of organization, must be filed with the secretary of state within the state that the company is formed and plans to conduct business. 

C corporation bylaws are written to set up guidelines for the company to handle any issues that appear and to define their formal procedures, such as how to buy and sell shares or how to elect officers. 

The shareholders of a C corporation are required to elect a board of directors, which will handle various company decisions and ensure the bylaws are followed. 

C corps are required to file annual reports with the secretary of state and to hold meetings with shareholders and owners. Check the particular state laws where your company is registered in to be sure you are following the requirements. 

The corporate officers are made public knowledge in a C corporation. However, other entity types are not necessarily required to disclose this information.

Some states allow close corporations, which have less record-keeping and other formal requirements. If this is not an option for your company, a business attorney can help ease the stress of the complex formalities involved with the running of a C corp.

Expensive to Start and Maintain

Forming a corporation can cost as much as $1,000 depending on where the company is formed. The owners or shareholders of a C corporation could face some fees when they start the company. There are also fees linked to the filing of articles of incorporation. 

If the corporation hires any attorneys to handle its paperwork, this will cost money. However, this expense will likely be worth the cost, as the paperwork can be overwhelming. 

C corporations require annual fees and some other regular costs. Therefore, it can be expensive to maintain this type of business structure. Common corporate costs include:

  • Preparing tax returns
  • Corporate formal requirements (annual reporting fees, etc.)
  • Double taxation potential.

The legal requirements associated with C corporations can be a bit daunting to the owners of the company. Some states require certain management structures within the company, and failure to follow these requirements can result in a loss of liability protection. 

It can also be complicated for a C corporation to do business in multiple states or to go completely public. If this is part of the plan for your business, however, the growth potential of a C corporation structure makes it the best fit for companies looking for expansion. Consulting a business attorney can help you handle the hurdles associated with expansion.

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