What is “Pass-Through” Taxation? Can it save me taxes?

One of the disadvantages of forming a corporation is that you are subject to double taxation and in some states it could be triple taxation. The corporation is considered a separate entity seperate from its stockholders and is taxed on its profits at the Federal level and at the state level again. When these profits are distributed to the shareholders as dividends, they are taxed again (on the personal level.)

You can avoid this double or triple taxation by forming an LLC or by electing to have your corporation treated as an S Corporation (by filing Form 2553 within 75 days of first forming the business or first transacting business and have less than 75 shareholders who all agree to this form of taxation)

S Corporations and LLCs are taxed as if they were partnerships - no tax is due on the entity level. Each partnership engaged in a trade or business must file a return on Form 1065 showing its income, deductions, and other required information. The return shows the names and addresses of each partner and each partner’s distributive share of taxable income and deductions. This is an information return and must be signed by a general partner. If an LLC is treated as a partnership, it must file Form 1065 and one of its members must sign the return. The partnership does not pay any tax on its income but “passes through” its profits or losses to its partners. Partners must include partnership items such as their distributive share of income and deductions on their personal tax returns.

This entry was posted on March 14, 2007 at 12:08 pm and is filed under What's New. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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