A corporation, sometimes called a C-corp, is a legal entity that is separate from its owners.  Corporations can make a profit, be taxed and can be held legally liable.    

 

Corporation Taxes​

Unlike sole proprietors, partnerships and S corporations, a corporation will pay income tax on their profits. In certain cases, corporations are subject to "double taxation" where they are first taxed when the company makes a profit and then taxed again when the dividends are paid to shareholders on their personal tax returns. Corporations report their income/losses and expenses on Form 1120.    

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Advantages of a Corporation​

• Owners do not have personal liability for the business's debts and liabilities.

• C-corporations have the ability to take more tax deductions than any other type of business structure.

• Owners pay lower self-employment taxes.

• Owners can offer stock options as a means of raising the capital needed for future growth. 

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Disadvantages of a Corporation​

•  C-corporations are subject to "double taxation" because the company pays taxes on the corporate tax return, and then the owners/shareholders pay taxes on the dividends that flow to their personal tax returns. 

• Owners cannot deduct business losses on their personal tax returns.  

• Corporations are subject to many formalities such as board/shareholder meetings, maintaining minute books and creating bylaws.  

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In sum, the best attribute of a C-corp is the strength of the limited liability. However, many businesses often forego the C-corp structure given the possibility of incurring double taxation if dividends are offered. This can be avoided if the owners invest the profits back into the business rather than taking dividends.