During the 1950s, when the top individual rate was in the low 90s, the top tax rate on traditional C-Corporations was 52 percent, almost 40 points lower than the top individual income tax rate.
Even when President John F. Kennedy lowered the top individual rate to 70 percent in 1963, there was still a spread of 22 points when compared with the top corporate rate of 48 percent.
Wealthy taxpayers simply shifted as much of their entrepreneurial income as they could from their individual tax return into a C-Corporation.
Continued use of C-Corporations as a tax shelter by the wealthy started to slow in 1981 thanks to President Ronald Reagan. The top individual rate was lowered from 70 percent to 50 percent while the corporate tax rate held steady at 46 percent.
An expansion in the total number of allowable shareholders in an S-Corporation and the creation of a new entity called the Limited Liability Corporation also decreased the use of C-Corporations during the early 1980s.
In 1986, the top individual tax rate of 28% finally dipped below the top corporate tax rate of 34%. Wealthy taxpayers who were still sheltering income using C-Corporations immediately began reporting most of their income on their individual tax returns by flowing business profits through sole proprietorships, S-Corporations or LLCs. Between 1986 and 1996, S-Corporations and LLCs overtook C-Corporations as the business entity of choice.
As a comparison, in 1958, C-Corporations and Partnerships (LLCs) numbered roughly 1 million each, with hardly any S-Corporations in existence. By 2010, C-Corporations stood at 1.5 million while Partnerships (LLCs) grew to 3.4 million, and S-Corporations grew to 4.2 million.
With the proliferation of Partnerships and S-Corporations, C-Corporations were now the forgotten business entity.