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Home | Business Formations | Incorporation

Incorporation

3. Two Types of Corporations

The IRS allows for a corporation to be taxed either as a "C corporation" or as an "S corporation."

C Corporations

A C corporation's profits are taxed at two levels. This is commonly referred to as double taxation. A C corporation pays a corporate tax on its corporate income (the first tax). Then, the C corporation distributes profits to shareholders who pay income tax on those dividends (the second tax).

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S Corporations

One way to avoid the double taxation of a C corporation is to make a special election with the IRS to be taxed as a S corporation, which is a pass-through entity taxed like a partnership or a sole proprietorship. That way, there is only one level of taxation. The corporate profits "pass through" to the owners, who pay taxes on the profits at their individual tax rates.

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