If you’re a business owner, chances are you’ve heard of “double taxation,” and the scourge it presents to business owners. Indeed, double taxation can eat into a company’s profits and aggravate any financial issues you might be having. But how is it possible for a business to be taxed twice? Is that even legal?
The term “double taxation” refers to the phenomenon where a corporation’s profits will be taxed twice: first, by the corporate income tax, and second, by a personal income tax when those profits are disseminated to shareholders in a dividend payout. While only the first round of taxation, the corporate income tax, directly impacts a corporation’s bottom line, both rounds of taxation ultimately eat into the profits that a corporation’s shareholders (which is to say, its owners) get to enjoy. And since profiting from a corporation is the entire point of starting a for-profit corporation, that can be a problem.
So, how do you avoid double taxation, if your business is organized as a for-profit corporation? Well, one way is to see if you qualify for S-Corp status. S-Corps are a kind of corporation that is treated as a “pass-through” entity, which means all the profits “pass through” the company to the shareholders without being subject to the corporate income tax. Instead, all the profits go to the shareholders and only gets subjected to the personal income tax of each shareholder. However, S-Corps must meet certain strict requirements, and not every corporation will be able to qualify for S-Corp status.
Another possible route is to reorganize as a Limited Liability Company (LLC). An LLC is, technically speaking, not a corporation, but instead a legal entity that exists to protect a business owner from financial or legal liability stemming from their company’s conduct. Like an S-Corp, an LLC is a pass-through entity, which means you don’t need to worry about corporate income tax with an LLC. Additionally, LLCs are more relaxed, in terms of the rules that govern them, which can make it easier to operate an LLC compared to a corporation, especially for small businesses. However, LLCs also face certain hurdles that corporations don’t, so an LLC may not be appropriate for every business.
In the end, deciding what kind of business structure is best for your business will require the advice of experienced legal counsel. The business attorneys at Blodnick, Fazio & Clark have the experience you need to make your business successful. If you want assistance in incorporating your business or forming an LLC, please call our Nassau County business lawyers at (516) 280-7105, or, for our Suffolk County business lawyers, call (631) 669-6300, or you can visit our contact page.
