The Danger of Double Taxation

Double TaxationOftentimes, when people are discussing corporate taxation, one of the things they’ll refer to is “double taxation,” and how unfair it is. The term may be confusing for people unfamiliar with the tax code, who wonder how it is that corporations can be taxed twice. However, it’s not as complicated as it sounds, and understanding double taxation can make a big difference when deciding how to organize your business.

The term “double taxation” refers less to the corporation itself, and more to the shareholders, the people who effectively own the corporation. The first round of taxation is the corporate tax, which is applied to the corporation’s income. However, before a shareholder can enjoy the benefits of the corporation’s money, they must either sell their shares on the stock market or receive a dividend payment from the corporation. Either way, the money the shareholder makes will be taxable to him or her, whether as a capital gain or as ordinary income, effectively taxing the that money twice. Hence, the term “double taxation.”

That said, not every business organization is subject to this sort of double taxation. So-called “pass through” entities, like LLCs or S-Corps, have their income pass through from the business entity to their ownership, without being subjected to corporate taxation. Instead, the money is taxed like any other form of personal income, just as though it was money earned from a job. However, these sorts of business organizations have strict limitations on how they can be organized and operated, and they may not be suitable for every kind of business.

Figuring out how to structure your business can be difficult, and you should contact an attorney with knowledge of all areas of business law to help you make the best business decisions for you. 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.

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