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Imagine a business with one owner. The owner employs 5 workers. Shouldn't the business pay tax on the profits? Suppose the business owner makes a profit of $100

Imagine a business with one owner. The owner employs 5 workers. Shouldn't the business pay tax on the profits? Suppose the business owner makes a profit of $100,000. Should this be tax free because he/she owns a business? If the business owner made $100,000 while working at 3M then the salary (profit) would be taxed. You are missing the exact point. If this business were owned as a sole proprietorship, then the owner would indeed claim the $100,000 as income and be taxed on it. If the business were owned as a C-corporation with only one shareholder, then the business would pay corporate taxes on any profits. Then, if the owner wants to have immediate access to those profits, she needs to distribute them to herself as a dividend. She would then pay taxes AGAIN, on the same income, since dividends are taxable. So, the second entrepreneur, just by virtue of owning a corporation, could be subject to a higher tax rate for the same income. That said, if one were to entirely eliminate the corporate income tax, then it would be all too easy to stockpile gains inside a corporation and let them compound tax-free until withdrawal, which would be a pretty nice tax shelter.

yequalsx 16y ago
Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays tax on this $20,000. Any entity that makes a profit pays tax on it (roughly speaking). This is consistent and fair. If the business (as an entity separate from the owner) decides to pay a dividend then whoever gets the dividend pays a tax on the money. Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Shouldn't I pay tax on it? There shouldn't be a distinction on who gets their dividends taxed. A dividend is a dividend. If the owner wanted $120,000 in salary then the owner should have paid herself $120,000. If she decides to give me a $20,000 dividend then I should pay tax on that dividend. If she decides to give herself a dividend then I she should pay a tax on that dividend. A dividend to herself is no more worthy of a tax break than a dividend to me. In the interest of consistency (fairness) the guiding principle is that an entity pay tax on money it gets after expenses. It also makes things easier.
- URSpider94 16y ago
  Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Your statement is not logical. A business can't just "decide" to pay a dividend to random individuals. A dividend, by definition, is a distribution of profits paid to the stockholders (owners) of the corporation. So, anyone who gets a dividend is, by definition, an owner of the business!
  - yequalsx 16y ago
    OK, I should have used a different word than dividend. I should have used "disbursement of funds from the profits made". The point still stands as do the other points I made.

yequalsx 16y ago

Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays tax on this $20,000. Any entity that makes a profit pays tax on it (roughly speaking). This is consistent and fair. If the business (as an entity separate from the owner) decides to pay a dividend then whoever gets the dividend pays a tax on the money. Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Shouldn't I pay tax on it? There shouldn't be a distinction on who gets their dividends taxed. A dividend is a dividend. If the owner wanted $120,000 in salary then the owner should have paid herself $120,000. If she decides to give me a $20,000 dividend then I should pay tax on that dividend. If she decides to give herself a dividend then I she should pay a tax on that dividend. A dividend to herself is no more worthy of a tax break than a dividend to me. In the interest of consistency (fairness) the guiding principle is that an entity pay tax on money it gets after expenses. It also makes things easier.

URSpider94 16y ago
Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Your statement is not logical. A business can't just "decide" to pay a dividend to random individuals. A dividend, by definition, is a distribution of profits paid to the stockholders (owners) of the corporation. So, anyone who gets a dividend is, by definition, an owner of the business!
- yequalsx 16y ago
  OK, I should have used a different word than dividend. I should have used "disbursement of funds from the profits made". The point still stands as do the other points I made.