C Corporation

S Corporation

Tax Treatment

A C Corporation is a taxable entity.

The business pays tax on its income.

Federal taxes are typically in the 35-percent range.

If the company pays a dividend, shareholders are taxed on that dividend. As a result, C Corporations are often said to face double taxation.

An S Corporation does not pay taxes directly.

It is a flow-through entity, meaning the income is passed through proportionately to shareholders who pay taxes.

The net result is typically a smaller total tax burden.

Distributions to shareholders are tax exempt to the extent they are from previously taxed income.

Capital Management

Companies set dividend policies to attract certain types of investors, for example, those who want current income look for companies that pay high dividends and manage their capital.

Companies that want to retain capital to finance growth, acquisition, etc., can choose to pay little to no dividends and retain the funds for other purposes.

S Corporations tend to pay out all, or the majority of, their earnings because the owners are taxed on earnings even if they are retained.

As a result, S Corporations tend to be restricted in their ability to grow.

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