Final answer:
C corporations and S corporations differ significantly in how they are taxed. A C corporation is independently taxed on its profits, while an S corporation's income is passed through to shareholders who report it on their personal tax returns.
Step-by-step explanation:
In tax discussions related to business structures like C corporations and S corporations, understanding the key distinctions is crucial.
A **C corporation** is a legal entity separate from its owners. One notable characteristic is that it faces double taxation. The corporation pays corporate income taxes on its profits at the applicable corporate tax rates. Afterward, if the profits are distributed to shareholders as dividends, the shareholders must report these dividends on their personal income tax returns, leading to a second layer of taxation.
On the contrary, an **S corporation** is a unique structure that mitigates the issue of double taxation. Profits and some losses "pass through" directly to shareholders, avoiding corporate-level taxation. Instead of the corporation being taxed on its profits, shareholders report their share of the income or losses on their individual tax returns. This pass-through taxation makes S corporations an attractive option for business owners seeking to avoid the double taxation associated with C corporations.
The choice between C and S corporation status often depends on various factors, including the size and nature of the business, the desired structure for ownership, and tax considerations. Both structures have advantages and disadvantages, and the decision is influenced by the specific goals and circumstances of the business owners.