C Corporation

A C corporation (or C-corp) is the most common legal structure for large businesses and virtually all publicly-traded companies in the United States. Think of Apple, Microsoft, or Coca-Cola—they are all C corps. This structure creates a completely separate legal and taxable entity from its owners, the shareholders. The magic of a C corp lies in its grant of limited liability, which means that as an investor, your personal assets (like your house or car) are shielded from the company's debts and lawsuits. You can only lose the amount you've invested. However, this protection comes with a famous catch: double taxation. The corporation pays taxes on its profits, and then you, the shareholder, pay taxes again on the profits you receive in the form of dividends. Understanding this trade-off is fundamental to grasping how your investment returns are generated and, more importantly, what you actually get to keep.

A C corporation is the default corporation type. It's a robust structure that allows a company to raise capital by selling stock, have an unlimited number of owners, and exist indefinitely. For investors, its two most defining features are the protective shield it offers and the tax bill it creates.

The most attractive feature of a C corporation is the thick legal wall it builds between the business and its owners. This is the concept of limited liability. If the company you invested in goes bankrupt or gets sued for billions, the creditors can only go after the corporation's assets. Your personal bank account, your home, and your other investments are safe and sound behind this “corporate veil.” Your potential loss is strictly limited to the money you paid for your shares. This protection is what makes public stock market investing possible for the average person; without it, buying a single share of a company could expose you to catastrophic personal risk.

Here's the flip side of the coin. Because the C corp is a separate taxable entity, it gets hit with taxes twice when it decides to share its profits with you. It's the taxman's double-dip. Here’s how it works:

1. Step 1: Corporate-Level Tax. The company earns a profit and pays corporate income tax to the government on those earnings.
2. Step 2: Shareholder-Level Tax. The company then takes its after-tax profits and may distribute some of them to you as dividends. You, the shareholder, must then report that dividend income on your personal tax return and pay income tax on it.

Example: Let's say ValueCo Inc. earns $100 in profit per share.

1. It first pays corporate tax. If the rate is 21%, it pays $21 in taxes, leaving $79.
2. The board decides to pay out all $79 as a dividend.
3. You receive the $79 dividend. If your dividend tax rate is 15%, you pay another $11.85 in taxes ($79 x 0.15).
4. Your final, take-home profit from the original $100 is just $67.15. The total tax bite was nearly 33%!

For a value investor, everything comes down to the long-term, after-tax return on your invested capital. The C corp structure is central to this calculation.

The issue of double taxation is precisely why many legendary value investors, most notably Warren Buffett, have historically preferred companies that retain their earnings rather than paying them out as dividends. When a C corp keeps its profits and reinvests them wisely back into the business—by building new factories, developing new products, or acquiring competitors—it can grow its intrinsic value. This growth is then reflected in a higher stock price. As an investor, you benefit from capital gains, which have two key advantages:

• Tax Deferral: You don't pay any tax until you decide to sell the stock. This allows your investment to compound for years or even decades without a tax drag.
• Potentially Lower Rates: In many countries, long-term capital gains are taxed at a lower rate than dividend income.

This is the secret sauce of Berkshire Hathaway: as a C corp, it retains nearly all its earnings, redeploying them to buy more businesses and assets, compounding shareholder wealth in a highly tax-efficient manner.

As an investor in publicly listed stocks, you will almost exclusively be dealing with C corporations. The lesson isn't to avoid them—that's impossible—but to understand how management operates within this structure. Does the company have a track record of allocating capital effectively? If it pays a dividend, is the underlying business strong enough to support it after taxes? Or, if it retains its earnings, is it generating a high return on that retained capital? Answering these questions is a core task of the value investor.

While C corps dominate the public markets, it's helpful to know they aren't the only game in town. Other structures are common for private and smaller businesses, primarily to avoid double taxation.

An S corporation (S-corp) is a special tax election that allows a corporation's profits and losses to be “passed through” directly to the owners' personal income without ever being taxed at the corporate level. This avoids double taxation. However, S-corps come with strict limitations (e.g., no more than 100 shareholders, who must be U.S. citizens or residents), making them unsuitable for large, publicly-traded enterprises.

A LLC (Limited Liability Company) and a Partnership are other common “pass-through” tax structures. An LLC is a hybrid that offers the limited liability protection of a corporation and the tax efficiencies of a partnership. These are incredibly popular for small businesses but are less common in the public markets, which are built for the scalability and capital-raising power of the C corporation.