Q:

Are C and S corporations taxed differently?

A:

Quick Answer

C and S corporations are taxed differently; C corporations are subject to corporate income tax, and S corporations are not subject to corporate income taxes, says BizFilings.com. S corporations are treated in a similar way as partnerships for tax purposes.

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Full Answer

The distinction between an S and C corporation is only in regard to the way they are taxed. Under business law, asset protection purposes and compliance requirements, they are the same under state law, says BizFilings.com.

A C corporation pays taxes and must file Form 1120 each year. It must report its income and claim its credits and deductions. An S corporation files a tax return but passes the corporation's profit or loss through form 1120S K-1 to the individual tax return. The taxes that are assessed and the tax liability are paid at the individual level, says Fox Business. Any losses an S corporation sustains are applied to other income to reduce shareholders' overall tax liability.

Another difference in tax differences between an S and C corporation is that owners of a C corporation cannot arbitrarily withdraw funds the same way a partner in a partnership or a sole proprietor does, states Fox Business. Any funds withdrawn, unless it is a loan repayment or a reimbursement for expenses, are classified as a dividend and subject to double taxation. An S corporation owner may withdraw funds against the profit as long as he is paid reasonable wages.

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