Many small companies are set up as Type “C” Corporations (“C Corp”), particularly those which have been in existence for many years. However, C Corps are subject to double taxation, and as a result, businesses may want to consider converting to an S Corporation (“S Corp”) to reap the tax benefits.
Tax treatment of C Corps vs S Corps
C corporations must pay taxes on earnings at the corporate level. In addition, their shareholders are also separately taxed on amounts distributed to them as dividends. Therefore, each dollar earned by a C Corp is taxed twice before it reaches the hands of the corporation’s shareholders.