Corporate Taxation: How a C-Corp is taxed

Incorporating your business as a C-Corp allows you more flexibility than you’d have as an S-Corp. You can choose to have several classes of shareholders with different voting rights as well as the freedom of having unlimited shareholders from any location.

That said, you’ll also have additional tax implications.

C-Corps pay taxes at the corporate level first, then individual shareholders pay taxes on dividends received. This opens up certain shareholders to double-taxation.

And while that sounds daunting, it’s actually not as bad as it seems. Let’s examine how it works:

First off, a C-Corp does not pay taxes on every dollar it brings in. Rather, C-Corporations deduct their business and operating expenses from their revenues, which then becomes the business’s taxable income. So if a company brought in $100,000 in revenue for a fiscal year but spent $65,000 in operating expenses, then the taxable income is $35,000, not $100,000.

Furthermore, shareholders in a C-Corp only get taxed if dividends are actually distributed to them by the company. If a C-Corporation chooses to retain its profits as operating capital, the individual shareholders do not pay taxes on those dividends. In an S-Corp, they pay regardless of whether the dividends were distributed or not.

In other words, only if a C-Corp makes a profit and distributes dividends to shareholders and owners is double-taxation in play.

There are even cases when C-Corp owners can choose to have their profits kept by the corporation as opposed to distributed, as they may be taxed at a lower rate. This, however, is best done in concordance with the advice of a seasoned accountant or corporate attorney. No matter what though, you will have to fill out IRS Form 1120, which is required for all C-Corps.

If you’re not sure a C-Corp is right for you, feel free to read our article about how S-Corps are taxed or the other differences between S-Corps and C-Corps. You can also visit our Incorporation Learning Center for more information.

 

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.