What is double taxation?

When a business is set up as a C Corp, this refers to the IRS code. This business would be registered under subchapter C of that code, which is the default position for many businesses. It can grow at an unlimited rate, and it is an independent legal entity.

However, one important thing to note about C Corps is how taxes are handled. It can lead to a phenomenon known as double taxation, wherein the money that travels through the business is taxed twice by the government. People are often looking for ways to get around this issue so that more of the money stays with the company, the owner and/or the shareholders.

The corporate tax rate

First of all, the federal corporate tax rate is going to apply to the money that the business earns. For instance, this could be set at 21%. The business pays 21% taxes on all of the revenue. 

Profits and dividends are then handed out to the shareholders, based on the company’s earnings and their investments. However, these count as personal income for those shareholders. As such, the distributions are taxed once again. This is how double taxation takes place. The government takes a cut at the beginning and after the distribution. 

Are there any solutions?

Yes, there are legal solutions to this issue. For instance, an S Corp could be set up with pass-through taxation. This is a major advantage because the corporation doesn’t have to pay the federal taxes first.

This is just one example of how corporate structures can impact a business’s earnings. The financial side of establishing a company can be very complicated and those involved need to understand their legal options.