Companies pay taxes on their annual income. When a company distributes dividends to shareholders, the dividends also have tax obligations. Shareholders who receive dividends must pay taxes on them. Hence the double taxation. Double taxation is often an unintended consequence of tax legislation. It is generally considered a negative element of a tax system, and tax authorities try to avoid it as much as possible. Owners of C corporations who wish to reduce or avoid double taxation have several strategies to follow: The tax changes introduced by Congress in the 2003 and 2004 tax laws created additional avoidance strategies available to C corporations with 100 or fewer shareholders. First, the laws lowered the highest personal income tax rate from 39.5% to 35%, which is the higher rate for businesses. Whether in C or S, the shareholder now pays the same rate.

At the same time, the 2004 Tax Act allowed S companies to have 100 shareholders, compared to 75. Many companies avoided S because they had more than 75 shareholders. With this change, all other things being equal, C companies of the right "shareholder size" can convert into an S-Corporation form, pay the maximum personal and corporate rate on profits (they are equal) and avoid the C Corporation dividend levy. While death and taxes can both be certain, taxes are the only one of the two that can happen twice. If you own a business, the last thing you want is to be taxed twice on your income. Double taxation occurs when a corporation pays taxes on its profits and then its shareholders pay personal taxes on dividends received from the corporation. We explain why double taxation occurs and how to avoid it. Critics of double taxation would prefer to integrate corporate and personal tax systems, arguing that taxes should not impact corporate and investment decisions. They argue that double taxation puts companies at a disadvantage compared to companies without legal capacity, encourages companies to use debt financing instead of equity financing (because interest payments can be deducted and dividend payments cannot) and encourages companies to keep their profits instead of distributing them to shareholders. In addition, critics of the current corporate tax system argue that integration would significantly simplify tax legislation. Business structures that typically have direct taxation are: A C Company (also known as "C Corp") is a legal entity that protects owners` personal assets from creditors.

It can have an unlimited number of owners and several classes of shares. These and other benefits make it a good way to attract venture capital and other types of equity financing. Unlike an S Corporation or LLC, it pays taxes at the corporate level. This means that it is subject to the disadvantage of double taxation. In addition, a C Corp must also meet many more federal and state requirements than an LLC. Since most companies sell goods through publicly traded stocks, they can easily raise funds by selling shares. This access to finance is a luxury that other types of entities do not have. It`s great not only for starting a business, but also for saving a company from bankruptcy when needed. One of the advantages of a C Corp over an S Corp or LLC is that it is easier to attract investors, including raising capital through equity financing.

Owning shares is generally preferred as owning LLC membership interests. In addition, venture capitalists prefer to invest in C companies. And indeed, many venture capitalists cannot invest in S companies or LLCs due to restrictions in their own government documents and tax laws. In addition, companies considering going public generally favor corporations over LLCs and cannot choose S corporate tax status due to the 100-shareholder limit. It can also be easier for a business to obtain bank financing. This factor can be particularly important for capital-intensive companies. International companies often face double taxation problems. Income can be taxed in the country where it is earned and then taxed again if it is repatriated to the company`s home country. In some cases, the overall tax rate is so high that it makes international business too expensive to pursue. There is no tax evasion if you receive dividends, but buying and holding shares long enough to comply with the rules for eligible dividends can at least give you a lower tax rate on that income.

You`ll still pay taxes a second time after the company has already done so, but the rate will be cheaper. Corporate shareholders often complain of being "taxed twice" because of this system. It occurs mainly in older large companies. Double taxation is when you pay twice income tax on the same source of income. In the case of corporations, double taxation means that a company is taxed both personally and professionally. Small business owners have a variety of options for determining the legal structure. .