Most people are generally familiar with the concept of double taxation. Corporate attorneys and accountants regularly raise the issue when asked by entrepreneurs about choosing the right business entity for a new company (or for an existing company looking to grow and insulate its owners from personal liability). Moreover, double taxation remains a hot button political issue. Whatever political side one falls on, double taxation is real and new and existing business owners need to be informed as they make critical business decisions regarding incorporation or the creation of some other formal entity.
The most common reason business owners incorporate is to insulate themselves from the liabilities of the business. This goal can be accomplished in ways that avoid double taxation, including the formation of a Limited Liability Company (LLC) or, if a corporation meets certain qualifications, by electing to be taxed as an S-Corporation. S-Corporations are taxed the same as partnerships (pass-through taxation). The profits are divided amongst the individual shareholders who are then taxed as individuals. The Corporation’s profits are not taxed separately. If an S-Corporation election is not made, then the entity is considered a C-Corporation and is taxed accordingly (double taxation).
The question then becomes, why would anyone ever wish to form a C-Corporation? A comprehensive answer is beyond the scope of this article. Businesses choose the C-Corporation for varied and complicated reasons most often with the guidance of a San Diego Business Attorney and tax professional. Larger entities planning on going public don’t typically qualify for the S-Corporation election and the LLC is still a relatively unknown entity to be an attractive business in the public market. There are also ways for smaller corporations to avoid double taxation and it is common for them to do so. See How to Avoid Double Taxation for Small Corporations.