Pass-Through Taxation vs. Double Taxation
01.The Pass-Through Model
For LLCs, sole proprietorships, and partnerships, the business itself pays no income tax. Profits flow directly to the owners' personal tax returns, where they are taxed at individual income rates.
02.Double Taxation of C-Corporations
C-Corporations are taxed twice: first, the corporation pays tax on its profits (currently a flat 21% federal rate). Second, shareholders pay individual tax on dividends distributed from those profits.
03.Comparing Long-term Tax Efficiency
While double taxation sounds disadvantageous, a C-Corp allows you to retain earnings within the company to reinvest at lower corporate tax rates, which is crucial for capital-intensive startups.