Entities That Can Use It. Corporations (one or multiple owners), general partnerships, limited partnerships, and limited liability companies (one or multiple owners) may select this type.

Main Characteristics. The central characteristic of C taxation is that there is an entity level tax on a graduated scale up to 35%; while the dividends and salaries paid are deductible in reaching the calculation of taxable income, not only salaries but dividends are taxed to the shareholders. Therefore, some of the business’ earnings are in fact taxed twice. (Note that this is reflective of the general law: corporations are treated as persons.) While earnings can be held and not distributed as dividends, this can go on only to a point, after which a penalty kicks in on the excess accumulated earnings.

C taxation provides the highest level of deductible fringe benefits, such as health, life insurance and such, but the lead over other tax types has been consistently narrowing.

Uses. C taxation is used by those who want its maximum deduction of fringe benefits (neither the entity nor the shareholder ever pays tax on the benefit), and can stay sufficiently on top of the accounting to "max out" on salary and dividends, thus effectively having no dividends and effectively one level of tax. C taxation is imperative for public corporations, and thus also for those going public within five years. 

This memorandum contains general information and while the information presented is accurate as of the date of its publication, it cannot be relied upon as legal advice, as that can only be obtained through personal consultation with an attorney with whom you share your specific facts.

 Copyright © 2005 by Sterling A. Minor. All Rights Reserved.

Last Updated: May 17, 2005