What is double taxation?
Double taxation refers to the way most corporations are taxed, which is different from how partnerships and LLCs are taxed. Partnerships and most LLCs are subject to pass-through taxation, where the business does not pay any direct taxes and passes any tax liability on to the owners. Corporations, however, are generally subject to so-called double taxation. The corporation pays taxes on its profits, and then the owners/shareholders again pay tax on any income, distributions and dividends they receive (of course, the details of how this double taxation specifically works are substantially more complicated). However, if your corporation meets the requirements, you can elect for it to be an S corporation. While C corporations use the double taxation described above, S corporations use the same pass-through taxation that partnerships and LLCs use.