“C” corporations pay taxes themselves. In addition, when they distribute income to the shareholders through dividends, the shareholders suffer from double taxation of those dividends.
A “C” corporation pays taxes as an entity separate from its shareholders. It files form 1120 with the IRS and pays federal (and possibly state) taxes based on its net income. The maximum corporate rate is 35%.
If (and only if) the board of directors declares and pays a dividend to the shareholders, the shareholders must include the amount of the dividend in their gross income. When the shareholders file their form 1040 tax returns, they pay tax on the dividend. As a result of thetax legislation of 2003, that tax is 15% of the dividend.