Double Taxation & C Corporation
A "C corporation" offers advantages such as protecting the personal assets of its shareholders. But double taxation on corporate earnings is a major drawback of a C corporation.
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C Corporation
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A C corporation can be referred to as a regular corporation. It has a legal identity separate from its shareholders and may enter into contracts, initiate legal process, be sued, and accumulate assets separately from its owners.
Effect on the Corporation
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The Internal Revenue Service views a C corporation as a regular taxpayer. Taxable income is computed before business expenses are deducted. C corporations can deduct various expenses, such as employee salaries, before filing corporate tax returns. Dividends to shareholders are not tax deductions for C corporations.
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Effect on Shareholders
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If money is left over after the C corporation pays its taxes, dividends may be issued to shareholders. Shareholders must report such dividends on their personal income tax returns. Tax on the C corporation's profits and shareholder dividends is known as double taxation.
Exception
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C corporation shareholders that are non-profit corporations, charities and other tax-exempt shareholders don't need to pay taxes on such dividends, the US Legal website explains.
Avoidance
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Double taxation may be avoided by forming an S corporation or a limited liability company. S corporations and LLCs offer business owners the same personal asset protection as a C corporation but need not file taxes on the business level. S corporation and LLC owners may report their shares of business losses and profits on their personal income tax returns.
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