What Is Double Taxation?
Double taxation is a corporate tax/legal principle where a corporation is taxed on its earned income, as well as shareholders being taxed personally on dividend payouts they receive from those same pool of earnings.
Who Can Be Double Taxed?Only C-Corporations deal with double taxation. Other types of businesses entities, like S-Corporations, Partnerships and LLC’s do not. This is because their earned incomes “flow-through” to their owners who are then taxed on their individual income tax returns.
To determine which entity is best for your business, you should consult a business lawyer to explain the benefits/risks of each and tailor your choice to your business needs.
Why is a C-Corp Double Taxed?It is because corporations are considered separate legal entities from their shareholders. This means that the corporations pay taxes on their earned income, just like an individual taxpayer.
The double taxation occurs because dividends paid out to shareholders are also taxable to that individual shareholder who receives them personally. Thus, the earned income is taxed once at the corporate level and again at the individual shareholder level.