How are corporations "double-taxed"?

I’m looking onto starting my own LLC and some of the documents comparing LLCs with other business structures say something like “C-corporations are subject to double taxation. Double taxation occurs when shareholders pay taxes on their salary at the same time that the corporation pays taxes on its profits”

As I understand it, if a corporation makes, say, $100,000, they deduct all costs (e.g. salaries) and then pay taxes on the profits. So, if the salaries total, say $80,000, then we could have something like:
[li]$80,000 goes to the employee, who is taxed at the income tax rate[/li][li]$10,000 are various costs in running the company[/li][li]$10,000 is the remaining profit for the corporation, which is taxed at the corporate tax rate[/li][/ul]

I don’t see the double taxation. What am I missing above?

Bonus question: How do I find a good tax advisor? Are there any companies with good reputation with branches in various states that you would recommend, or is it best to find a local guy/girl via word-of-mouth recommendations?

I guess if the remainder of this profit, after taxation, is distributed to LLC members they then have to pay income tax on that money, resulting in double taxation. However, what prevents the company from setting the salary to revenues minus operating costs, resulting in zero profit for the company?

It doesn’t make sense to talk about “salaries of shareholders.” Shareholders don’t draw a salary.

However, if the corporation issues dividends to shareholders, dividends are paid out of profit which was already taxed, and the shareholders have to pay tax on the dividends as ordinary income. That is probably what you read.

There is a lot of loose talk in general about “double taxation” and it’s kind of a red herring. Money is taxed every time it changes hands in a commercial transaction (corporate income tax, payroll tax, income tax, sales tax, it’s a never-ending chain). Happens all the time, nothing underhanded about it.

My experience has been that self-incorporated individuals do exactly this (I do), by giving out a year-end bonus that “zeroes out” the corp account.

An LLC is not a C-corporation, so your comment about LLCs does not directly address the OP question about C-corporations. There is a good explanation of LLC taxation in Wikipedia. LLCs can be taxed in multiple ways.

Well, I pay tax on my income. Then I’m taxed when I spend my income. And what’s worse, the things I buy have the taxes of their manufacturers built into their prices. So I’m personally triple-taxed. At least. Probably more.

I thought the whole point of incorporating was so you could pay the lower corporate tax rate instead of the income tax. If your income tax rate was lower than the corporate tax rate, why would you incorporate yourself in the first place? To limit your liability?

Yes. Sole proprietorship, the basic “guy running a business” model, leaves your entire worth at stake. Incorporation limits the liability to the corporation, and lets you keep your house.


if you don’t incorporate, you cannot deduct your business expenses from your taxes. If a guy that’s incorporated hires a freelancer from Craigslist to help with his work, he can deduct the expense. Without incorporation there would be no deduction and your entire income from a project you do for your client is considered “taxable income” even if you only made a small actual profit after paying for the various expenses.

And if you really work your ass off, live prudently, save instead of spend and finally end up with lots of money or owning a business or a farm, the government will tax your money AGAIN when you die before your children can inherent your assets. And your children will be forced to liquidate your company or sell your farm to pay these taxes.

Government (politician’s) greed has no bounds.

Right, corps are double- even triple or ten times taxed. So are we. It’s a meaningless bit of doubletalk to get to to sympathize with the corporations. Like “Death Taxes”.:rolleyes:

Mangosteen- there are HUGE exclusions for the Estate tax- 3.5 million plus extra for Family Farms and businesses. The Pubbies were challenged to find a single family farm that had been "sold to pay off the Death taxes’ and couldn’t. In fact, it’d be very hard for a family farm to even owe a nickle of Estate Taxes. :dubious:

Why on earth do dudes believe the lies of filthy rich people? They want to pay less taxes on their millions, so YOU can pay mores taxes on your *thousands. *:rolleyes:

wrong. so wrong it’s not even funny.

Right. Err right, he’s wrong. code_grey, check out a thing called a “Schedule C”.

Last year I got a refund on a previous year’s tax, and it was reported to the IRS and added to the next year’s income and taxed again.

So I was overtaxed, the money was held by the government, which kept the interest it generated, and then I was taxed again when the refund arrived.

I don’t pretend to understand it.

You should tell that to every 1099 freelancer in the country.

I assume it was a State Tax refund, and thus since you deducted the full amount withheld on your Federal SCH A, any refund would thus be taxable.

What about businesses? No family run companies worth over 3.5 million? or whatever the limit is?

Seeing how the average tax dollar is spent these days, everyone no matter how much money they have should be making every effort to pay as little as possible.

Why do you use the term filthy? Do you think that people who you feel are “rich” are somehow dirty because of it? And don’t deserve the wealth that they have?

What exactly do you have against people who have lots of money?

Here is my favorite explanation of the “double taxation” claim.

Corporations don’t die. Perhaps an unsavvy business owner, operating under a sole proprietorship (or poorly thought out limited partnership) may have an issue if his company were large enough, but given that 30 seconds with any halfway competent accountant could address estate planning for a business, it is unlikely for a large business to expose itself and its owners in this manner.

Well, it depends upon your definition of “family run business”. But again, there’s a base 3.5 Mill exclusion, plus an extra exclusion for a “family business”. And D_Odds is correct- any decent tax planning will just about negate any estate taxes on any “family business”.

Yes, if you are that rich, you *are *“filthy rich”. Not my term. You have never heard that expression before?

None- as long as they pay their fair share of taxes.