How do taxes apply to a C corporation?

A C corporation is a separate taxable entity from its shareholders, which means that it must pay taxes on its corporate income (less any business expenses). When the corporation pays dividends or some other form of profit distribution to its shareholders, the shareholders must then pay taxes on those payments. This scheme is known as double taxation, because a tax is applied to what is essentially the same money twice - once at the corporate level and then again at the shareholder level. This differs from the type of taxation that applies to S corporations, which is the same pass-through taxation used by partnerships and LLCs.

Of course, many smaller C corporations are able to avoid paying much, if anything in taxes. This is because with smaller corporations, the shareholders are often also employees so their salaries and bonuses can be deducted by the corporation as a business expense. These deductions often cancel out whatever income the corporation had, leaving it with no tax burden (but the shareholders must still pay their taxes, obviously).