How are C Corporations taxed?

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C Corporations are subject to a taxation system known as "double taxation." This means they are taxed at two separate levels: first, at the corporate level on their profits, and second, at the individual level when those profits are distributed to shareholders as dividends. When the corporation earns income, it is required to file a corporate tax return and pay taxes on the taxable income. Once this income is distributed to shareholders in the form of dividends, shareholders must also report this income on their personal tax returns and pay taxes on it.

This structure is significant because it impacts investment decisions and the financial planning of both corporations and their shareholders. Understanding the implications of double taxation is crucial for businesses and investors when considering the best company structure for financial and tax purposes.