C corp s corp essay

A traditional C Corporation is treated as a separate legal entity by the U.S. Internal Revenue Services (IRS). The business is charged corporate income tax for profits earned. The shareholders are liable to pay personal income tax on income earned from the company, i.e. profits earned in the form of dividends.

When an entity is taxed as a partnership, like an S Corp, it is able to avoid double taxation. For those that don’t know, double taxation applies to every incorporated business. Incorporated businesses pay taxes on the income they, as a business, earn along with taxes that you, the owner, earns from working for the business.

The ‘C’ in C Corporation stands for the subchapter of the IRS code which governs the federal taxation of the entity. This structure is much more traditional than that of an S Corp. Any gains or profits made by the business are distributed to the shareholders to be taxed twice, resulting in double taxation.

Shareholders are also considered to be employees of the business and must be paid reasonable compensation, or a salary, to avoid having the IRS reclassify their corporate earnings as wages. Business owners will still be required to pay personal income taxes as well. Why would I incorporate as an S Corporation?