Question

Explain how corporate income is double taxed and why this is a disadvantage only to corporations but not to a proprietorship or partnership ?

Answer 1

Double taxation refers to income tax being paid twice on the same source of income. Double taxation occurs income is taxed at both the corporate level and personal level, as in the case of stock dividends. The corporation must pay income tax at the corporate rate before any profits can be paid to shareholders. Then any profits that are distributed to shareholders through dividends are subject to income tax again at the recipient's individual rate.

Partnership or proprietorship income of the business is passed through to the owners, who pay the taxes on their individual income tax returns. So, the owners of these businesses are taxed directly, unlike a corporation that pays its own taxes. That is why it is a disadvantage only to corporations but not to proprietorship or partnership.