Question
C corporations are not pass through entities like S corporations or LLC's. C corporations are subject to the double taxation concept on corporate earnings. This
C corporations are not pass through entities like S corporations or LLC's. C corporations are subject to the double taxation concept on corporate earnings. This is where corporate earnings are taxed at both the entity level and a second time when the earnings are distributed to shareholders in the form of dividends. Let's discuss this double taxation for a moment and put some numbers to it. Let's say that a C corporation has $1,000,000 in taxable income. Under the new tax law it will pay a tax at the rate of 21% or $210,000. Let's then say that the C corporation then distributes the remaining $790,000 to its shareholders in the form of dividends. The shareholders will pay a second tax at the rate of 20% or $158,000. Thus, the IRS has received $368,000 in tax on the $1,000,000 of income or a combined tax rate of 36.8%. If the corporation was an LLC or was eligible and made an S corporation election, the tax rate would be 20% or $200,000. The tax savings is $168,000 by making the S election or being an LLC. S corporations are pass through entities. So are partnerships, limited liability companies, limited partnerships, and limited liability partnerships. It is usually, but not always, advantageous for a startup business to be a pass through entity. While the income from a pass through entity is taxed to its owners, any losses from the business also pass through. Losses are very common in the early years of a startup. The owners want to deduct these losses against any other income they may have. In my experience, this ability to deduct the losses is just as important as avoiding double taxation. In sum, it is not so much about the income as it is about the losses. What do you think?
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