Perhaps the most significant tax disadvantage for owners of C corporations is that these entities have a form of double taxation. The corporation itself is taxed, as are the dividends it earns. These taxes are collected before the shareholders receive their after-tax shares of the profits. This is the main reason that many people choose to create a different kind of business entity such as an S corporation or a partnership.
There are three other significant tax disadvantages to C corporations:
- If there is any taxable gain from the liquidation or sale of corporate assets, there will also be double taxation to the shareholders
- In terms of special allocations of profits or expense items, C Corporations are less flexible than partnerships
- Losses to the corporation cannot be passed through to the shareholders
