Thomas Paralegal

In the choice of legal structures to insulate properties and businesses, the tax burden must be given special attention. For example, some of the disadvantages of corporations are the presence of too many controls and restrictions and double taxation on cash dividends. This is because a corporation is a separate taxpaying entity. The combination of corporate taxation and individual taxation is a major weakness in corporate planning .
Sole proprietorship’s have a single-tier tax burden. Corporations and partnerships have a two-tier tax burden. Generally, the income of corporations and partnerships are taxed and the shareholders and partners are taxed separately based on their share of dividends and partnership profits. In the United States, there is also a pervasive impression that partnerships enjoy an advantage over corporations because corporate income is taxed twice (both to the corporation and the individual shareholder), while partnership income is only taxed once. While this is true in theory, it is often meaningless in practice.
Small corporations usually avoid double taxation by paying out most of what would otherwise be corporate profits in the form of salaries and bonuses (rather than in dividends). This is not too difficult to accomplish because the principal corporate employees are normally the owners. As long as salaries are not completely unreasonable, the taxing authorities would have no objection. Money paid in salaries, bonuses, social security health plans) and other fringe benefits, is a business expense for the corporation and is thus not taxed to the corporation.
Another advantage of what amounts to dividing income between two tax entities (the corporation and the employee-owner) is that profits retained by the corporation in the form of inventory or cash for future expansion are not taxed to the business owners on their personal returns (as would be the situation with a partnership), but are taxed to the corporation. This results in an actual tax savings for U.S. corporations because these corporations are taxed at a lower tax bracket as opposed to the higher tax rate most individuals must pay in the United States .
General professional partnerships (GPP) are not subject to income tax. Persons engaging in business as partners in a GPP shall be liable for income tax in their separate and individual capacities. Note that business partnerships are taxed as corporations. There is a global tax rate of32 percent for domestic corporations. Business partnerships are taxed in the same way as corporations. The definition of the term “corporation” includes partnerships, no matter how created or organized, joint- stock companies, joint accounts (cuentas en participacion) , associations, or insurance companies, but does not include a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy corporations pursuant to an operating or consortium agreement under a service contract with the Government