Business Startup

Choosing a Business Entity: Understanding Double Taxation v. Pass-through Taxation

When forming a business, an important thing to consider is how profits will be taxed. Different corporate structures have different tax consequences. “Double taxation” refers to situations where corporate profits are taxed and the corporation’s shareholders are personally taxed upon receiving dividends or distributions of those profits.

“Pass-through taxation” refers to situations where income “passes through” to investors or owners. Common types of pass-through entities are limited liability companies, limited liability partnerships, and S corporations. The partnership or company itself is not directly taxed; however, the income of the partnership is taxed, and these taxes are passed through to each partner according to their ownership interest, regardless of whether that partner actually received a distribution (i.e. money in their pocket) or...

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