The C Corporation

The C corporation is the standard corporation used by most every public company.

The defining feature of the C corporation is the manner in which it is taxed.

Income to the corporation is taxed at the corporate level, according to applicable corporate tax rates.  Any excess income that passes out to shareholders in the form of dividends are taxed at the dividend rate.

This creates the possibility of double taxation: money flowing to a shareholder may be taxed at both the entity level, and at the individual level (as dividends).

Creative accounting techniques can be used to soften this tax blow, by making sure that excess profits are distributed as salary or bonuses to key shareholders instead of as dividends.

Salary and bonuses are tax-deductible to the corporation, and so are only taxed at the individual shareholder’s income tax rate.

The key advantages of the C Corporation are their widespread acceptance in all States, and the unlimited number of shareholders.

However, for small corporations, the hassle of addressing the double taxation trap can be time consuming and expensive.

Therefore, many small corporations prefer to be taxed as an S Corporation.