A corporation is a legal entity separate from its owners. In the US, a C corporation pays its own income tax. An S corporation is a corporation that has elected pass-through treatment. Elsewhere, corporations (Ltd, GmbH, SA, BV, Pte Ltd) are almost always taxed at the entity level.
C corporation taxation
| Layer | 2026 rate |
|---|---|
| Federal corporate income tax | 21% flat |
| State corporate income tax | 0% to 11.5% (see state guides) |
| Qualified dividends to shareholders | 0%, 15% or 20% |
| Net investment income tax | 3.8% above $200,000 (single) |
Worked example
A C corporation earns $1,000,000 of taxable profit in a state with a 6% corporate rate and distributes everything to a top-bracket shareholder.
| Step | Amount |
|---|---|
| Taxable profit | $1,000,000 |
| State tax at 6% | $60,000 |
| Federal tax at 21% on $940,000 (state tax is deductible) | $197,400 |
| Profit after corporate tax | $742,600 |
| Dividend tax at 23.8% | $176,739 |
| Shareholder keeps | $565,861 |
| Total effective rate | 43.4% |
If the profit is retained for growth instead, the effective rate is 25.7% until it is distributed.
When a C corporation makes sense
- You're raising venture capital. Preferred stock, multiple share classes and option pools require a C corporation.
- You want QSBS. Founders and early investors can exclude up to $15 million or more of gain under Section 1202 for stock issued after July 4, 2025, with a 50% exclusion from three years and 100% from five years.
- You will reinvest profits. Retained earnings are taxed at 21% plus state, below the 37% top personal rate.
- You plan an IPO or acquisition by a public company.
S corporations
An S corporation passes income through to shareholders. Owners who work in the business must take a reasonable salary, but remaining profit can be distributed without payroll tax. Restrictions:
- Up to 100 shareholders, all US individuals, certain trusts or estates
- One class of stock (voting differences allowed)
- No corporate or foreign shareholders
Some states don't fully recognize S corps. New York City and the District of Columbia tax them as corporations; California charges a 1.5% franchise tax with an $800 minimum; Tennessee and Texas apply their franchise taxes.
State corporate taxes
States use three main approaches:
- Corporate income tax: 44 states plus DC. Highest top rates: New Jersey 11.5% (with surtax), Minnesota 9.8%, Illinois 9.5% combined, Pennsylvania 7.49% for 2026 and falling.
- Gross receipts taxes: Nevada, Ohio, Washington and Texas tax revenue or margin instead of income. Delaware and Oregon layer one on top of corporate income tax.
- No corporate tax: South Dakota and Wyoming.
Franchise taxes based on capital or authorized shares also apply in states including Delaware, Tennessee, Louisiana, Mississippi, Arkansas, Georgia and North Carolina.
Deductions and credits for corporations
- 100% bonus depreciation, permanent for property acquired after January 19, 2025
- Immediate expensing of domestic research costs under Section 174A
- R&D credit, with up to $500,000 usable against payroll tax for qualified small businesses
- Net operating losses carried forward indefinitely, limited to 80% of taxable income
- Interest deduction limited to 30% of adjusted taxable income, now computed on an EBITDA basis again
Corporations outside the US
| Country | Entity | Headline rate |
|---|---|---|
| United Kingdom | Ltd | 19% to 25% |
| Germany | GmbH | ~30% combined |
| Ireland | Ltd | 12.5% trading |
| Singapore | Pte Ltd | 17% with partial exemptions |
| UAE | LLC / FZ-LLC | 0% up to AED 375,000, then 9% |
See Corporate Tax 101 or compare an LLC with a corporation.
Frequently Asked Questions
What is the corporate tax rate in the US in 2026?
The federal corporate income tax rate is a flat 21%. States add their own corporate income taxes ranging from 0% in South Dakota and Wyoming to 11.5% in New Jersey on large profits, and several states use gross receipts or franchise taxes instead.
What is double taxation?
A C corporation pays tax on its profit, and shareholders pay tax again when profit is distributed as dividends. At the top federal rates, the combined burden on distributed profit is about 39.8% before state taxes.
What is the difference between a C corp and an S corp?
A C corporation is taxed at the entity level. An S corporation passes profit through to shareholders like a partnership. S corps are limited to 100 shareholders who must be US citizens or residents, and can only issue one class of stock, which makes them unsuitable for venture funding.
Why do startups incorporate in Delaware?
Delaware has a specialized business court, a large body of corporate case law, flexible corporate statutes and familiarity among investors and lawyers. A Delaware corporation still pays income tax in the states where it actually operates.