A business entity is generally taxed as a C corporation if it is organized and operated under a state corporation statute, if it is an association that has elected to be taxed as a C corporation, or if it is a publicly traded partnership. One of the most significant questions facing the owners of a new business is what form in which to operate. Both tax and non-tax factors influence the choice of the appropriate business form. Operating a business as a C corporation can be very costly from a tax standpoint because C corporations, unlike pass-through entities, are treated as separate taxable entities and are subject to double taxation. In other words, C corporation income is taxed twice- once when earned and once when distributed to the owners of the business.
If an entity is a C corporation, the entity must compute its own taxable income and pay tax on that income. Although the overarching conceptual framework is the same, there are differences between the way a C corporation computes its taxable income and the way an individual computes his/her income. For example, a C corporation is not entitled to personal exemptions or a standard deduction. There are certain deductions, such as the deduction for alimony, that apply only to individuals. In contrast, there are certain deductions, such as the dividends received deduction and the deduction for net operating losses, that apply only to corporations.
A C corporation is an entity apart from its owners. Hence, for both tax and financial purposes, it selects its own accounting method and accounting period. The rules regarding the tax rates and tax returns of C corporations are different than those for individuals. For example, instead of filing separate corporate returns, a group of affiliated corporations may file a single, consolidated tax return. Furthermore, C corporations are subject to taxes that do not apply to individuals. For instance, a C corporation may be subject to an environmental tax, a personal holding company tax, and an accumulated earnings tax.
There are special rules which apply to the various types of transactions entered into by a corporation, such as distributions, redemptions, reorganizations, and liquidations.