C-Corporations Taxes

C corporations

Corporations must file IRS Form 1120, among other forms, rather than Form 1040. All business activity is reported on this return and, unlike sole proprietorships, partnerships and S corporations, the C corporation pays tax directly on its net profits. Owners pay tax on the salaries and dividends they receive from the corporation on their individual returns at the appropriate tax rates.

Advantage of C corporations:

Corporations can raise money by selling stock. And they may be able to attract and retain the best and brightest employees who want the best benefits and the possibility of stock options.

Corporations are more complicated, but they don’t carry the personal liability for debts that sole proprietorships do because they’re separate legal entities, and not tied to an individual’s personal finances.

Drawbacks of C corporations:

But there is a major downside, other than the onerous paperwork and the administrative time: double taxation. Corporations must pay corporate income tax, and shareholders are required to pay taxes on dividends on their individual returns.

Also, because the laws and regulations governing C corporations are more complex and their administrative fees higher than those of a sole proprietor, they tend to be in place at larger companies with many employees.