Legal Entities And Tax Liabilities

Legal Entities and Tax Liabilities



The definition of a corporation is an organized form of business in which the ownership of the business is held by stockholders, or shareholders-individuals who have purchased ownership shares in the business. The corporation is organized with a board of directors and officers. The board of directors is elected to make the business decisions that affect the overall business condition and financial health of the business. Officers are elected to oversee the day-to-day operations of the business. The corporation exists as a legal entity in and of itself. Today, the latest proposal is to relieve this legal entity of its tax liability. Let's take a look at the different tax structures of the corporations, and how this proposal will affect our corporate community.

One of the greatest advantages to operating your business as a C Corporation is concerned with the liability of the individual shareholders. When you purchase stock in a corporation, you are only liable to the extent of your investment; nothing further. This is a true fact, unless there is a situation where the corporate "veil" is pierced. Then the liability of the shareholders guilty of piercing the veil will be questioned. What does this term "piercing the corporate veil" mean? It means you do not keep your personal finances separate from the corporation's finances. It looks like the guilty shareholder is using the corporation in personal ways, and this increases the liability of the shareholder in question.

The great disadvantage is the "double taxation" of profits. Any profits shown by the corporation are taxed, and then any dividends paid to investors, are also taxed. The corporation receives no tax deduction for profits distributed to investors in the form of dividends, therefore there is a situation created for double taxation: the corporation is taxed on the profits, and when those profits are distributed to shareholders, they are taxed again. However, this is just a casualty of the situation: if you wish to have the business entity treated as a separate legal entity, it must also be treated as a separate taxable entity.

The situation created by the formation and operation of an S Corporation differs from that of a C Corporation, in that net profit and net losses are flowed through to the shareholders, via a K-1. Generally, S Corporations are formed by small businesses or family owned situations when there is a need for liability protection, but the business is not large enough to support the operating conditions of a C Corporation. This is a better tax situation for the small business owner, but does not relieve them entirely of tax liability.

However, the current tax system imposed on corporations by the U.S. government is at best, a biased system; for corporations that have a net profit, taxes on those profits amount to a full one-third. So, if you're doing business as a standard "C" corporation, and you do manage to make a profit, you're going to owe Uncle Sam about 30%. That's an amazing figure, so let's look at some of the behind-the-scenes information that will help to enlighten us as to the "why" so much tax should be levied.

The first thing you must understand when dealing with the corporate tax structure, is that for the most part, many large corporations do not pay the complete 30% tax that would typically be levied against an individual if they were in the same situation; corporate accountants and the sheer process by which corporations must report their income, expenses, deductions, depreciation, dividends, and any other financial transactions allows for huge deductions that typically offset any tax due. This concept is a major topic of discussion today, as we attempt to better control and regulate corporate accountability of their finances.

The latest proposals have been to eliminate the corporate tax altogether. This would shift the tax burden to the individuals of this country; that is a tremendous shift from the post-war era of the Second World War, when corporations and individuals shared the responsibility almost equally. Thanks to the lobbying done by corporate lobbyists over the last thirty years, we've finally reached the point of no return. The latest proposals have come from within the halls of Congress to eliminate corporate tax, and let the average taxpayer assume all the responsibility.

When you factor in the ability of the wealthy and the corporate entities of this country to hire brilliant accountants that find loopholes in the tax system, and relieve their clients entirely of their tax liability, you cannot believe that the current system operates for the people, by the people, can you?