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How C Corporations are Taxed
C Corporations pay two levels of taxes:
- Corporate level taxes. As of writing, federal corporate tax is 21% plus state taxes.
- Then each shareholder pays income tax on dividends paid by the corporation
Knowing that shareholders are going to be subject for double taxation sounds scary to most people. But let us shed some light on this matter, because C Corporation tax calculation is not bad after all.
C Corporations do not pay taxes on every dollar earned because taxes are calculated after deducting all operating expenses first, reducing total taxable income.
Unlike LLC, shareholders in C Corporations only get taxed if dividends are distributed to them by the company. If dividends are kept within the company and not distributed, then double taxation does not apply. Owners or members of LLC get taxed regardless if the profit has been distributed or not.