A regular C-Corporation is taxed by the Federal Government on profits, and again when those profits are “distributed” to the shareholders as “dividends”. This is known as double taxation (the same money is taxed twice). Corporations file a separate tax return called form 1120. Some states also tax a Corporation’s profits or apply a “franchise tax” to the company for the privilege of doing business in the state.
“S-Corporations” (“S” means “Small”) avoid double taxation by adding any profits to the shareholders’ personal tax returns. For example, if your company made $10,000 in profit last year, instead of paying Federal Corporate Tax on that money (currently at 21%), you would simply add it to your personal 1040 tax return (assuming you were the only shareholder, otherwise, the $10,000 would be split up among the other shareholders based on their ownership percentage) and pay taxes based on your personal income tax rate. “S-Corporations” file form 1120S but do not pay Federal tax. Some states also tax an S-Corporation’s profits or apply a “franchise tax” to the company for the privilege of doing business in the state, but most follow the Federal treatment and allow the income to be reported on the shareholders’ personal tax returns. The vast majority of small corporations are S-Corporations.