Double taxation is a term used to describe the way taxes are imposed on corporate shareholders and on corporations. The corporation is taxed on its earnings (profits), and the shareholders are taxed again on the dividends they receive from those earnings.
There is a continuing discussion about the fairness of taxing dividends in addition to taxing the corporation; note that the corporation itself pays tax on its profits and dividends are taxed to the individual shareholders.
Corporate taxes vs. LLC taxes
Corporations pay income taxes as separate entities from their shareholders, while the profits of an LLC are taxed directly to the owners, who share the taxes on profits/losses based on their membership share.
Corporate taxes vs. S corporation taxes
S corporations are a specific kind of corporation that is taxed more like a partnership than a corporation. S corporation profits are taxed to the owners on their individual income tax returns. Read more about the S corporations, including how S corporations are taxed.
Another description of double taxation applies to shareholders who are also employees and owners of the corporation:
- The "owner" of the corporation receives a salary as an employee. This salary is taxed at the regular personal income tax rate.
- In addition, the owner is also a shareholder. If the corporation pays dividends on the profits of the corporation, the owner must pay the tax on those dividends on his/her personal tax return.
Read more about how corporations pay taxes.
Read more about 4 reasons to incorporate your business.