What distinguishes a "C Corporation" from an "S Corporation"?

A "C Corporation" is distinct from an "S Corporation" primarily due to its tax treatment under the Internal Revenue Code. C Corporations are subject to what is known as double taxation: they pay taxes at the corporate level on their profits, and then when these profits are distributed to shareholders as dividends, the shareholders must pay personal income taxes on those dividends.

This characteristic of being taxed at the corporate level contributes to the notion that C Corporations operate as separate tax entities from their owners. The income generated by a C Corporation is taxed once at the corporate level and again at the individual level when dividends are distributed, which creates that scenario of double taxation.

In contrast, S Corporations are designed to avoid this double taxation by allowing income, losses, deductions, and credits to pass through directly to shareholders, who then report them on their personal tax returns. This allows S Corporations to operate as flow-through entities, in which the income is only taxed at the individual level.

Understanding the tax implications is crucial for businesses and owners when deciding on their corporate structure, which can affect tax liabilities significantly.