Frequently Asked Questions
What is the issue of double taxation in corporations and how does it affect LLCs?
Double taxation is a significant issue that corporations face. This occurs when the company pays a 21 percent corporate tax on all profits, and then members pay tax on individual dividends at rates for capital gains, which can be as high as 23.8 percent. However, retained earnings are not subject to this double taxation. In contrast, Limited Liability Companies (LLCs) are treated differently for tax purposes. They are considered "pass-through entities," similar to sole proprietorships or partnerships. This means that the profits and losses are not paid by the business itself but are reported by individual members on their personal tax returns. Even though there is no federal tax for LLCs, some states may require them to pay annual taxes. The issue of double taxation does not affect LLCs in the same way it does corporations. This is because the profits left in the company bank account at the end of the year are subject to income tax, and each LLC member pays taxes based on their membership share of profits and losses. These are called distributive shares and should be set forth in the LLC's operating agreement.
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