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Double Taxation Problems

What is double taxation?

Double taxation is where two separate jurisdictions levy taxes on the same declared income, assets or financial transactions. In other words, it could occur with income tax, capital tax or sales tax. Certain countries have tax treaties to mitigate the effects of double taxation. In the U.S., the term double taxation usually refers to a situation where tax is levied on a corporation’s profits as well as on the shareholders’ income when they receive a part of this profit. Listed below are a few questions answered by the Experts on double taxation problems.

If a person was to start their own business and wanted to avoid double taxation and protect their assets, would an S-Corporation or a Limited Liability Company (LLC) be better for the person?

In most cases, both an S-Corporation and an LLC would provide asset protection to the owner as long as they followed the proper procedures and adhered to the guidelines. Double taxation generally happens when the corporation is taxed and then the employees of the corporation are taxed as well through their paychecks. To choose what is best for the business, it would be better to speak with an attorney and a CPA in the state where the business is going to be registered to ensure that all guidelines are met to avoid double taxation.

If a person wanted to start a company, would they want to start it in the State of Massachusetts so that it would be cheaper to avoid double taxation? And how would filing for an LLC versus a corporation affect this?

In most cases, filing for an LLC in the State of Massachusetts would cost around $500 and filing for a corporation would cost around $275. If you are planning to file for a corporation, it may be better to file as an S-Corp so that the business may get pass-through taxation and avoid double taxation. However, filing for an LLC is a less complicated process due to the absence of shareholders. If you have many shareholders, you may need the assistance of an attorney. For more information on this, visit http://www.limitedliabilitycompanycenter.com/llc_vs_s_corp.html

What is the difference between an S-Corp and a C-Corp?

An S-Corp is generally considered a pass-through entity where all the income passes through the shareholders so the company doesn’t pay taxes. Double taxation does not usually occur here because the only taxes that are paid are the personal taxes of the shareholders. A C-Corp, on the other hand, is generally taxed as a separate entity and files a corporate tax return. Here, the shareholders have to pay taxes on their personal income as well as on after-tax profits given to them by the corporation in the form of dividends—leading to double taxation.

What is the difference between an LLC and a corporation?

A corporation and an LLC are both considered limited liability entities as well as flow-through entities. In the case of a corporation, you could choose to be treated as an S-Corp to avoid double taxation. However, an S-Corp is more limited in terms of the kinds of shareholders that they have, so you may consider an LLC because they have more flexibility if you need to add shareholders later on.

In business, there are several rules and regulations that govern double taxation. While you may have come across some of the problems related to double taxation above, there could be others that pertain to your own unique situation. If you need more clarity on this topic, put your questions to an Expert for quick insights and information to deal with your own case.
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Recent Double Taxation Questions

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    I've heard that LLC owners can address the issue of "phantom" income by addressing the issue with a distributions clause in their operating agreement, which should provide an annual payment to each owner that is sufficient to pay the taxes that each owner owes on the profits. Does one still have to do this (create a distribution clause) if an LLC is taxed as a corporation?
  • I hung my art in a restaurant. A customer bought it with a

    I hung my art in a restaurant. A customer bought it with a credit card through the restaurant's credit card machine. They did not charge the customer sales tax. The restaurant sent me a check for the amount of the purchase, less a 5% service fee for running it through their business, and less 8.25% sales tax . Since if have a tax ID#, how do I report this? The restaurant has the money for the sales tax....I don't. Am I going to be paying the sales tax twice? Once at the restaurant and again when I report my sales to the state?
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    Hello,
    I have a Delaware C corporation with a few shareholders. The Delaware corporation fully owns a company in Italy for which we have found a buyer. If we sell this company, is there a way to pass the capital gains directly to the shareholders without double taxation?
    Best Regards,
    Gionata Mettifogo
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