C-Corporations, also known as C-Corp, are the most common type of corporation in the United States. They are separate legal entities from their owners, meaning the owners are not personally liable for the debts or obligations of the corporation. This makes them a popular choice for businesses seeking to limit their personal liability.
However, the legal separation of C-Corporations from their owners also means that they are subject to taxation. The taxation of C-Corporations is a complex issue, but in this article, we will provide a basic overview of how C-Corporations are taxed and what it means for business owners.
First, it’s important to understand that C-Corporations are taxed twice: once at the corporate level and again at the shareholder level. The corporate tax rate is 21% for tax years starting in 2018 and after. This means that the corporation will pay taxes on its profits before distributing any of the profits to its shareholders.
Once the profits are distributed to the shareholders as dividends, the shareholders will then pay taxes on their dividends at their individual tax rate. This is known as double taxation and is one of the disadvantages of a C-Corporation.
There are ways to reduce the impact of double taxation. For example, corporations can pay salaries to their shareholders, who are also employees of the corporation. These salaries are considered a business expense and can be deducted from the corporation’s taxable income. The shareholders will then pay taxes on their salaries at their individual tax rate, which may be lower than the tax rate on dividends.
Another way to reduce the impact of double taxation is to use the “S Corporation” election. S Corporations are a type of corporation that allows the business to be taxed as a pass-through entity, meaning that the business profits are taxed only once, at the individual shareholder level. To become an S Corporation, the corporation must meet certain eligibility requirements and file the appropriate tax forms.
In conclusion, C-Corporations are taxed twice, which can result in double taxation. However, there are ways to reduce the impact of double taxation, such as paying salaries to shareholders or electing to be taxed as an S Corporation. Business owners should consult with a tax professional to determine the best approach for their specific situation.