Understanding U.S. Policy: Corporate Taxation

Corporate taxation laws in the United States can be a bit confusing if you have never dealt with them before. Understanding corporate taxation can help you make the right decision when starting a business entity. Here are the basics of corporate taxation.

"C" Corporations

One of the most common types of corporation is the "C" corporation. This is what large companies that have many shareholders use. With this model of taxation, the corporation itself pays taxes on the profit that it makes as a company. Then when they distribute dividends to the shareholders, the shareholders are also taxed on the money. This creates a form of double taxation that many business owners have complained about over the years.

"S" Corporation

Another type of corporation is the "S" corporation. This is designed for smaller companies that have few shareholders. With this business model, the corporation itself does not pay any taxes. All of the liability for the taxes goes directly to the shareholders of the company. Therefore, if there is a profit, the shareholders will pay taxes. If there is a loss, the shareholders get a deduction on their personal taxes. With this method, the shareholders have to pay the taxes regardless of whether any money was actually distributed to them, or if it was reinvested in the business. 

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