What is the difference between a 'C' corporation and an 'S' corporation?

What is the difference between a 'C' corporation and an 'S' corporation?

• A. 'C' corporations pass profits or losses to their shareholders, avoiding corporate-level taxes.
• B. 'C' corporations pay taxes on their profits, while 'S' corporations pass profits or losses to their shareholders.
• C. 'C' corporations are taxed only at shareholder level.
• D. There is no difference in taxation.

Answer: (B)

Understanding how each type is taxed is the key distinction. C corporations are separate taxable entities that file their own corporate income tax return and pay tax on profits at corporate rates. When those profits are distributed to shareholders as dividends, they’re taxed again on the shareholders’ personal returns—this is the double taxation that characterizes C corporations. S corporations, by contrast, are pass-through entities. The profits and losses flow through to shareholders and are reported on their individual tax returns, so the entity itself generally pays no federal income tax. This avoids the corporate-level tax, though the shareholders still pay taxes at their personal rates. There are eligibility rules for S status (like limits on the number and type of shareholders and one class of stock) that affect whether a company can elect it. The statement that describes C corporations paying taxes on profits while S corporations pass profits or losses to shareholders accurately reflects this difference. The other options either suggest C corporations evade corporate tax or deny any difference, which doesn’t align with how these entities are taxed.

Understanding how each type is taxed is the key distinction. C corporations are separate taxable entities that file their own corporate income tax return and pay tax on profits at corporate rates. When those profits are distributed to shareholders as dividends, they’re taxed again on the shareholders’ personal returns—this is the double taxation that characterizes C corporations.

S corporations, by contrast, are pass-through entities. The profits and losses flow through to shareholders and are reported on their individual tax returns, so the entity itself generally pays no federal income tax. This avoids the corporate-level tax, though the shareholders still pay taxes at their personal rates. There are eligibility rules for S status (like limits on the number and type of shareholders and one class of stock) that affect whether a company can elect it.

The statement that describes C corporations paying taxes on profits while S corporations pass profits or losses to shareholders accurately reflects this difference. The other options either suggest C corporations evade corporate tax or deny any difference, which doesn’t align with how these entities are taxed.