A corporation must be composed of shareholders, directors and officers. As a legal entity, a corporation is distinct from its shareholders, and shareholders enjoy the same personal liability protection that members of an LLC receive. Corporations are subject to a number of legal requirements and “corporate formalities” to which other types of businesses are not, though the specifics of these depend on the type of corporation. Double taxation is a tax principle referring to income taxes paid twice on the same source of income.

From a protections perspective, members of an LLC are not personally liable. Because the LLC is an entity created by state statute, it has flexibility in regards to federal tax treatment. For instance, a single-member LLC can be taxed as a sole proprietorship or a corporation. There is some debate around double taxation on corporate dividends.

LLC and C-Corp Defined

Fundamentally, sole proprietorships are intended for simple, one-owner businesses. Think freelancers, consultants, small service businesses, food stands, etc. Sole proprietorships do not have shares or ownership units which means the only exit option is to sell the assets of the company. Certain investments with a flow-through or pass-through structure, such as master limited partnerships, are popular because they avoid the double taxation syndrome.

For multi-owner companies, a partnership or LLC wins out for simplicity. As we celebrate Small Business Week, it’s a great time to explore the best business financing options for you — whether you’re starting out or scaling up. You may be wondering why we called out the 10 percent penalty for early 401(k) distributions. This may seem ancillary to the discussion, but it’s actually a hidden gem in the Internal Revenue Code that makes it possible to make a tax-preferred investment in yourself. Let’s look a little deeper at the different types of income your business is subject to.

Double Taxation of Corporate Income in the United States

At 47.5 percent, the U.S. top integrated tax rates are above the OECD average for both dividends and capital gains. C corporations get their name from the section of IRS code, subchapter C, that regulates them. In the early days of the United States, most companies received charters to perform specific public functions, like building a bridge or improving a road. The charter would last as long as it took for the work to be completed; often, it was revoked soon afterward. The corporation did not have many other rights, other than the basic right that a government would acknowledge its existence.

• Because each of these taxes have their own rates, rules, and triggers, you and your business can actually be taxed many times over in different ways.
• As it is, your company and you as an individual are subject to many types of taxes, the most notable are payroll taxes, income taxes, taxes on dividends, and potential early distribution taxes from your 401(k).
• A capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation.
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• This ensures profits aren’t double-taxed (once under the corporation and again under the owner).

The earnings distributed to these shareholders are therefore not double-taxed. By some recent estimates, the share of U.S. corporate stock held in taxable accounts has fallen from more than 80 percent in 1965 Outsourcing Bookkeeping: A Cost-Saving Opportunity to about 25 percent today (Rosenthal and Austin, 2016). C corporations are subject to an extra layer of transparency that other business structures, such as LLCs and general partnerships, do not have.

Ownership structure

They are required by law to hold an annual general meeting (AGM) for both the shareholders and the board of directors, at which, important decisions are announced and discussed. A C corp must elect a board of directors whose https://kelleysbookkeeping.com/how-much-do-bookkeeping-services-for-small/ responsibility it is to draft bylaws or written protocols for how the company will function. The C corp is also required to have a corporate structure, with shareholders, a board of directors, officers, and employees.