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Corporate Taxation - Essay Example

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Corporate Taxation

This fact protects a corporation’s shareholders from legal action or liability because of the identity of a corporation as a legal entity, for example, if a company defaults or slips into bankruptcy, the debtors will go after the company’s assets in order to recover their debt. If the company’s assets are not enough to cover the debt, legally the debtors cannot go after the directors, officers, or shareholders personal assets in order to recover their debts. This is the primary advantage of a corporation. C and S Corporations There are many types of corporations, but in terms of taxation, there are two types of corporations. The two types refer to the special types of tax categories or elections recognized by the internal revenue authority. The two types of corporations are C and S corporations, and they have different advantages and disadvantages, and formulation processes. The formulation process of both types of corporations is similar, and it starts with filing at the state level before proceeding to the IRS. The structures between the two types of corporations are similar, and the two share a number of characteristics such as allowing shareholders, directors, and officers to separate their personal assets from corporation assets. The major difference between the two types of corporations is the taxing system attached to each. The taxation regime applied on S corporations sets many restrictions to the shareholders compared to shareholders of C corporations (Block 56). C Corporation Taxation This election of corporations includes all the publicly traded or listed companies. It is the most common structure of a company found in the United States. This corporation is recognized as a separate legal entity, and shareholders’ own it. A C Corporation does not have a maximum number of shareholders because of its independent legal nature; it is an independent legal entity, therefore, entitled to an unlimited number of shareholders. The nature of the corporation limits the liability of each shareholder to the amount of investment committed to the corporation. The legal nature of a C corporation and the structure of its formulation allow application of different tax laws compared to an S Corporation. Revenue or income generated by such a corporation is taxed at the corporate tax level rates as directed by the corporate income tax levels stipulated by the Internal revenue Authority. After taxation at the income tax level, any distribution in the form of dividends to shareholders is subjected to taxation at shareholder tax rates. Another advantage of C corporations in terms of taxation is the fact that salaries may offset income tax. Salaries paid at the corporate level are not subject to corporate income tax deductions, but the recipients are subjected to income tax, and FICA tax. This nature of taxation loopholes enjoyed by such corporations may result in the corporate evading paying corporate taxes because the net profit may be converted to salaries to shareholders or owners. Accumulation of earnings after corporate level taxation is not taxed as in the case of S corporations. The profits will only be taxed when they handed out to shareholders in the form of dividends. However, a corporate risks facing accumulated tax ...Show more

Summary

Name Instructor Course Date Corporate Taxation Introduction A corporation is defined as a legal entity that is distinct. This definition enables a corporation to do business, open and run bank accounts, and own property using its legally recognized name. The general affairs and weighty business decisions of a corporation are managed and sighted by a board of directors, which consists of individuals who are nominated or elected by the majority of shareholders of the company…
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Corporate Taxation Essay essay example
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