Corporations FAQ

How is corporate income taxed?

Unlike sole proprietors and owners of partnerships and LLCs, a corporation's owners do not pay individual taxes on all business profits. The owners pay taxes only on profits paid out to them in the form of salaries, bonuses, and dividends. (Dividends are portions of profits that large corporations sometimes pay out to shareholders in return for their investment in the company.) The corporation pays taxes, at special corporate tax rates, on any profits that are left in the company from year to year (called "retained earnings").

Note that this taxation scheme does not apply to S corporations, which are corporations that have elected partnership-style taxation. (Regular corporations, discussed above, are called C corporations.) If your corporation elects to be taxed as an S corporation, all of the corporation's profits and losses will "pass through" to the owners, who will report them on their individual income tax returns. (To learn more about S corporations, see Nolo's article S Corporation Facts.)

For more information on regular corporate taxation, see Nolo's article How Corporations Are Taxed.

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