Last updated: October 2026
A C corporation is the default form of incorporation, and its defining feature is a disadvantage: profits are taxed at the entity level and again when distributed to shareholders. Businesses accept that for one reason above all others — a C corporation can issue multiple classes of stock, including the preferred shares institutional investors buy. If you intend to raise venture capital, this is the structure, and the tax treatment is the price. Bay Legal, P.C. incorporates California businesses and prepares the governance and stock documents that a financing requires.
Definition: A C corporation is a corporation taxed separately from its shareholders under Subchapter C, with no limit on the number or type of shareholders or classes of stock.
Why do investors require a C corporation?
Because of what an S corporation cannot do. An S corporation may have only one class of stock, no more than 100 shareholders, and no shareholder that is a partnership, a corporation, or a non-resident alien. Venture funds are partnerships or corporations, they invest across borders, and they buy preferred stock carrying liquidation preferences and protective provisions that a single class cannot deliver.
Every one of those constraints is fatal to a priced round. A C corporation has none of them: unlimited shareholders, entity and foreign investors permitted, and as many classes of stock as the Articles authorise. That is the whole explanation for why founders accept double taxation, and it is worth stating plainly rather than leaving a reader to infer it.
A related practical point. Founders who expect to raise within a year or two are usually better off incorporating at the outset than converting from an LLC under time pressure during a financing. Conversion is available, but it costs more and it happens at the moment when everyone’s attention is elsewhere.
How is a C corporation taxed in California?
Twice federally, and once more at state level. The corporation pays federal corporate income tax on its profits; shareholders then pay personal tax on dividends they receive. On top of that, California charges a corporate franchise tax on net income derived from California sources, subject to the $800 annual minimum under Revenue and Taxation Code section 23153 whether or not the company is profitable.
Double taxation bites less than it sounds for a company that does not distribute. A growth business retaining earnings to fund expansion pays entity-level tax and nothing at shareholder level, because there are no dividends. The second layer arrives on distribution or, in a different form, on sale. This is why the structure suits companies reinvesting and penalises companies distributing profit to owner-operators — which is exactly the profile that elects S status instead.
C corporation or S corporation?
| C corporation | S corporation | |
|---|---|---|
| Federal entity tax | Yes; dividends taxed again | No entity-level federal tax |
| California entity tax | Franchise tax on net income, $800 minimum | Reduced-rate franchise tax on net income, $800 minimum |
| Shareholder limit | Unlimited | 100 |
| Who may hold shares | Anyone, including entities and non-residents | Individuals, certain trusts and estates only |
| Classes of stock | Multiple, including preferred | One |
| Venture capital | What investors require | Effectively unavailable |
| Typical fit | Growth companies retaining earnings | Profitable owner-operated businesses |
Note the second row. Neither structure escapes California entity-level tax — the S election removes the federal layer, not the state one, under Revenue and Taxation Code section 23802. Comparisons built on federal treatment alone overstate the S corporation’s advantage for a California business.
Does incorporating actually protect shareholders personally?
Generally, and conditionally. Shareholders are not personally liable for the corporation’s debts and obligations — that is the point of the structure, and for arm’s-length commercial liabilities it holds up.
The qualification matters more for closely held companies than for large ones. Courts can disregard the entity and reach shareholders where corporate formalities were ignored, the company was inadequately capitalised for its business, funds were commingled, or the corporation operated as a mere instrumentality of its owners. The doctrine is applied sparingly, but where it is applied it is almost always to a small corporation run informally.
What protects you is unglamorous: a separate bank account, adopted bylaws that are actually followed, minuted meetings, current filings, adequate capital, and contracts signed in the corporation’s name rather than your own. And no entity protects anyone from liability for their own negligent acts.
What does a C corporation have to do each year?
- File the Statement of Information with the California Secretary of State annually under Corporations Code section 1502. Missing it brings penalties and eventually suspension, and a suspended corporation cannot sue, defend a lawsuit, or enforce its contracts.
- Hold and minute meetings of shareholders and directors, and keep the corporate records current.
- Pay the franchise tax, at minimum the $800, and file the California corporate return with the Franchise Tax Board.
- Maintain the stock ledger. Issuances, transfers, and cancellations recorded contemporaneously. Cap table problems surface during diligence, and they are far more expensive to reconstruct than to maintain.
- Observe securities requirements on every issuance, including the exemption filings that apply to a private placement.
Who handles incorporation at Bay Legal?
Managing attorney Jayson R. Elliott leads the firm’s business practice, covering incorporation, bylaws, stock issuance, shareholder agreements, and investor structuring. Where a shareholder dispute arises, it moves to the litigation group under lead litigation attorney Evan Livingstone.
The firm does not provide accounting or tax filing services and works alongside the client’s CPA. Bay Legal, P.C. serves businesses statewide from offices in Palo Alto and Los Angeles, including founders across San Francisco and the wider Bay Area.
Frequently Asked Questions
What is double taxation, and how bad is it really?
The corporation pays tax on its profits, and shareholders pay again on dividends. It bites less than it sounds for a company that retains earnings to fund growth, because there are no dividends to tax. It bites hardest on owner-operated businesses distributing profit — which is the profile that usually elects S corporation status instead.
Why do venture investors insist on a C corporation?
Because an S corporation may have only one class of stock, no more than 100 shareholders, and no partnership or corporate shareholders. Venture funds are partnerships or corporations and buy preferred stock with liquidation preferences. Every one of those constraints is fatal to a priced round, so the C corporation is the only workable structure.
Does a C corporation pay California tax as well as federal?
Yes. California charges a corporate franchise tax on net income from California sources, subject to an $800 annual minimum under Revenue and Taxation Code section 23153 whether or not the company is profitable. That applies to S corporations too, at a reduced rate — the S election removes the federal entity layer, not the state one.
Are shareholders ever personally liable?
Generally not for corporate debts, but the protection is conditional. Courts can disregard the entity where formalities were ignored, the company was undercapitalised, or funds were commingled — and that happens almost exclusively to small corporations run informally. No entity protects anyone from liability for their own negligence.
Should I incorporate in California or Delaware?
If you do business in California you register here and pay the $800 minimum regardless, so Delaware means two sets of fees. It is generally worth it only for companies raising institutional capital, where investors and their counsel expect Delaware corporate law and standard documents.
Can a C corporation convert to an S corporation later?
Yes, by filing Form 2553 if it meets the eligibility criteria — no more than 100 shareholders, one class of stock, and no ineligible shareholders. A company that has already issued preferred stock to investors cannot, which is one reason the choice at formation matters.
Related Questions
What are authorised versus issued shares?
Authorised shares are the maximum the Articles permit; issued shares are those actually held by shareholders. Authorising more than you issue leaves headroom for future rounds without amending the Articles.
What is a liquidation preference?
A preferred stockholder’s right to be repaid before common shareholders on a sale or winding up. It is one of the central economic terms in a venture financing, and it is only available where multiple classes of stock exist.
Do I need a shareholders’ agreement?
Bylaws govern the corporation; a shareholders’ agreement governs the people — transfer restrictions, buy-sell terms, and deadlock. Any corporation with more than one shareholder benefits from one negotiated early.
How many directors does a California corporation need?
It depends on shareholder numbers: one shareholder permits a single director, two require at least two, three or more require at least three. The bylaws should state the number or a permitted range.
Talk to a California corporate attorney
If you expect to raise institutional capital, the structure is largely decided and the questions are about stock, governance, and timing. To discuss incorporating with a Bay Legal attorney, call the office nearest you or email intake.
Bay Legal, P.C. — serving California statewide
Northern California office
667 Lytton Ave Ste 3, Palo Alto, CA 94301
(650) 668-8000
Southern California office
3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068
(213) 668-8000
Intake: intake@baylegal.com
Fax: (650) 963-0041
Website: https://baylegal.com
This page is general information about California law and does not constitute legal advice or create an attorney-client relationship. Bay Legal, P.C. does not provide tax advice. For advice on your specific situation, contact a licensed California attorney and a qualified tax professional.