Understanding Double Taxation
Benjamin Franklin once quipped that “nothing is certain but death and taxes.” Every taxpayer knows this pithy statement to contain at least a grain of truth. Consumers and corporations alike seek to avoid paying taxes whenever possible, and to reduce the amount of taxes that they are required to pay. So why is it that certain types of corporation are subject to something called “double taxation?” What is double taxation?
Double Taxation and the C-Corporation
The C-Corporation is a type of legal business entity formed when a company decides to incorporate. By forming a C-Corp, business owners gain several benefits, not least of which is liability protection separate from the corporation itself. In other words, the business owners and shareholders are not held responsible for any liability incurred by the corporation beyond the investment or interest they hold in the corporation.
One disadvantage of a C-Corporation, however, is known as double taxation. As the name implies, double taxation means that a taxpayer or tax-paying entity is taxed twice on the same income. For a C-Corp, double taxation occurs because the company’s profits are taxed at two points. First, the corporation itself pays taxes on its earnings, and second, the shareholders themselves are once again taxed on the money they receive from the corporation.
The Debate
People with business interests are usually opposed to the idea of double taxation. They argue that it is unfair for anyone to be taxed twice, and that such a policy not only hurts the taxpayer but the economy as a whole. According to this viewpoint, the “penalty” of double taxation discourages people from investing their money and helping the economy grow and create jobs.
On the other, some people feel that there is nothing wrong with double taxation when it comes to corporations. They argue that double taxation is a fair price to pay for the liability protection enjoyed by owners and shareholders of a corporation. They also point out that, by the very nature of a corporation, it is considered a separate and independent legal entity from its shareholders, and thus, logically, ought to be taxed independently as well.
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