Double taxation is a horrible practice, which many governments around the world embrace thoroughly. It’s the nasty habit of a government to tax your company’s profits, and then when you distribute the after-tax profits to the shareholders, they, too, have to pay tax on money for which the company already paid tax.
In the United States, we have wrestled with the dividend tax in many ways, but the creation of the IRS tax code known as Subchapter S is probably the best known and most effective way to avoid double taxation. Basically, it states that a company organized as an S corporation does not pay tax at the entity level. Instead, the company passes its dividends through to its shareholders and they pay the tax on their portion of ownership.
Pass-through tax treatment can also be achieved through the LLC but major corporations, with thousands of shareholders, cannot avoid double taxation since there is 100-person limit on the number of shareholders an S-Corp can have.
This blog category will help you understand all the benefits of an S corporation as time goes on. We invite you to join the conversation by leaving a question or comment.
There is 1 comment left for A Brief Background on S-CorporationsEka said: Saturday, April 14, 2018
Does income have to be passed onto shareholders in S corporation or van it remain in the corporationHBS Staff replied: Tuesday, April 17, 2018
Traditionally, the profits and the losses of an S corporation pass through the entity to the shareholders; however, without details, it is hard to answer that question, as there are other options. Your best bet is to consult an accountant or tax attorney.