Final answer:
A C corporation is subject to double taxation because the corporation itself pays income taxes on its profits, and the dividends paid to shareholders are also taxed at the individual level. This double taxation can make C corporations less appealing compared to other business entities with pass-through taxation.
Step-by-step explanation:
A C corporation is subject to double taxation because it is considered a separate legal entity from its shareholders. This means that the corporation itself pays income taxes on its profits. Additionally, when the corporation distributes dividends to its shareholders, those dividends are taxed as well. So, the same income is being taxed twice – once at the corporate level and again at the individual shareholder level.
For example, let's say a C corporation earns $100,000 in profits. The corporation will pay corporate income tax based on the tax bracket it falls into. Then, if the corporation decides to distribute $50,000 in dividends to its shareholders, those dividends will also be taxed at the individual level based on each shareholder's income tax rate.
This double taxation can make C corporations less attractive to some business owners, who may opt to form other types of business entities, such as S corporations or limited liability companies (LLCs) that offer pass-through taxation.