Disadvantages of Corporations
Double Taxation
Double Taxation: Depending on what special rights and restrictions are attached to the shares, and how the profits of the corporation are paid out to the shareholders, there is the possibility of double taxation: the corporation must pay taxes on its profits and the shareholder may be subject to taxation on the profits paid out. This can result in greater taxation than if a corporation was not used for the business.
C corporations pay taxes on profits when corporate income is distributed to owners (shareholders) in the form of dividends. This is the first taxation.
The shareholders who receive dividends must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money.
The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is an out. Choose the IRS’ "S Corporation" tax status to avoid double taxation.
In other systems, dividends are taxed at a lower rate than other income)(for example, in the US) or shareholders are taxed directly on the corporations profits and dividends are not taxed
Double taxation is levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of income taxes), or financial transaction (in the case of sales taxes). This double liability is often migrated by tax treaties between countries.
Example: You decide to set up a corporation and have a profit of 1,000,000 in the first year. Suppose the government taxes corporate profits at 30%, then the corporation has to pay 300,000 in taxes. It is decided that 500,000 will be distributed as dividends and the dividend tax is 10%, so you will lose a further 50,000 to the government when you file your personal taxes. This is the concept of double taxation: first the company was taxed for its profits, and later shareholders were taxed for their dividends.
Double Taxation: Depending on what special rights and restrictions are attached to the shares, and how the profits of the corporation are paid out to the shareholders, there is the possibility of double taxation: the corporation must pay taxes on its profits and the shareholder may be subject to taxation on the profits paid out. This can result in greater taxation than if a corporation was not used for the business.
C corporations pay taxes on profits when corporate income is distributed to owners (shareholders) in the form of dividends. This is the first taxation.
The shareholders who receive dividends must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money.
The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is an out. Choose the IRS’ "S Corporation" tax status to avoid double taxation.
In other systems, dividends are taxed at a lower rate than other income)(for example, in the US) or shareholders are taxed directly on the corporations profits and dividends are not taxed
Double taxation is levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of income taxes), or financial transaction (in the case of sales taxes). This double liability is often migrated by tax treaties between countries.
Example: You decide to set up a corporation and have a profit of 1,000,000 in the first year. Suppose the government taxes corporate profits at 30%, then the corporation has to pay 300,000 in taxes. It is decided that 500,000 will be distributed as dividends and the dividend tax is 10%, so you will lose a further 50,000 to the government when you file your personal taxes. This is the concept of double taxation: first the company was taxed for its profits, and later shareholders were taxed for their dividends.