Question

How does the double taxation of corporate distributions affect whether an individual business chooses to operate a business as a C corporation or a flow-through entity?

Answer 1

Double taxation occurs when the taxes are imposed on corporate shareholders as well as on corporations. A C corporation is a separate taxpayer from its shareholders, thus it files a corporate tax return on Form 1120 and holds the responsibility for paying tax. C Corporation faces a biggest drawback of a "double taxation" potential. The C Corporation is taxed double, firstly the corporate profits are taxed, and then shareholders pays taxes again when dividends are distributed. And the corporation is not allowed to deduct dividend distributions. However the flow-through entities are known as pass-through entities, can avoid double taxation and dividend tax because only owners or investors are taxed on the revenue