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Northwest Brands
Avoiding Double-Income Taxation
Northwest Brands, Inc., is a small business incorporated in Minnesota. Its one class of stock is owned by twelve members of a single family. Ordinarily, corporate income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this double-income taxation? Explain your answer.
Because corporations are considered fictional 'persons' under the law, they are taxed as separate entities. The incomes of their owners (shareholders) and employees (from the most lower-level employees to the members of the boards of directors) are all subjected to income tax. This is called double taxation as income is taxed "once to the corporation itself and then a second time when earnings are paid out to the corporation's owners (shareholders). This is true only for earnings paid out to shareholders in the form of dividends -- that...
While the policy of double taxation makes sense when taxing the profits of a large corporate entity which is owned by thousands of shareholders and has an independently-operating CEO, for smaller companies, incorporation could theoretically mean that the organization would be subjected to a considerable disadvantage in terms of tax policy: the income of the owners could be taxed from running the business as well as the income owners derived from holding shares.
However, in the case of Northwestern Brands, Inc. this worst-case scenario is unlikely to transpire. "In practice, this sort of double taxation seldom occurs in a small corporation" (What is double taxation, 2013, Nolo). With a very small company in which the owners make up the entirety of the shareholders, there…
References
Double taxation. (2013). INC. Retrieved:
http://www.inc.com/encyclopedia/double-taxation.html
What is double taxation? (2013). Nolo. Retrieved:
http://www.nolo.com/legal-encyclopedia/corporations-faq-29122-8.html
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