Being the standard type, a business structured as a C corporation subjects its shareholders to double taxation. First, the business files Form 1120 and pay a corporate tax rate of 40% on net income after expenses. Every shareholder that receives dividends must report those and pay a personal tax rate of 30% on gross income after allowable deductions (Berk & DeMarzo, 2010). Accordingly, shareholders typically receive about 42% of dividends, as shown below.
An enterprise registered as an S corporation is, on the other hand, not normally liable for corporate income tax or Self-employment tax (Simple Subjects LLC, 2010). It is only necessary, when they file federal return Form the 1120S, to report the profits or losses of the business. The individual shareholders are then expected to report the full extent of the revenue “passed through” and pay the proper personal tax rate, as shown below (Internal Revenue Service, 2010). In the example given, the effective tax rate to shareholders is 30%, the same as the individual income tax rate.
References
Berk, J. & DeMarzo, P. (2010). Corporate finance: The core (2nd Ed.). Upper Saddle River (NJ): Prentice Hall.
Internal Revenue Service (2010). Corporations. Web.
Simple Subjects, LLC. (2010). LLC vs. S-Corp vs. C-Corp (the 3-minute version). Web.