A corporation is a specific kind of business that differs legally from the stockholders who own it. A company is able to establish contracts, hold property, sue and be sued, and pay taxes. The primary benefit of a corporation is that its shareholders have limited liability, which exempts them from being held personally liable for the firm’s debts or losses. A corporation’s principal drawback is that it is subject to more laws and taxes than other kinds of enterprises.
The shareholders in this kind of corporation, which is the most prevalent, choose a board of directors to run the company. A C company must pay personal income tax on dividends received by shareholders and corporate income tax on its earnings. For the stockholders, this results in a difficulty with double taxes.
Such a firm chooses to be taxed as a pass-through entity and is therefore exempt from paying corporate income tax. Instead, the corporation’s gains and losses are transferred to the shareholders for inclusion on their personal income tax returns. As a result, the issue of double taxation is avoided, but the number and kind of shareholders who can own a corporation are also restricted.
