on 21-Feb-2025 (Fri)

A limited liability company (LLC) is a limited partnership without a general partner. That is, all the owners have limited liability, but unlike limited partners, they can also run the business.

The distinguishing feature of a corporation is that it is a legally defined, artificial being (a judicial person or legal entity), separate from its owners. As such, it has many of the legal powers that people have. It can enter into contracts, acquire assets, incur obligations, and, as we have already established, it enjoys protection under the U.S. Constitution against the seizure of its property.

Taxation of Corporate Earnings Problem You are a shareholder in a corporation. The corporation earns $8 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 25% and your tax rate on dividend income is 20%. How much of the earnings remains after all taxes are paid? Solution First, the corporation pays taxes. It earned $8 per share, but must pay 0.25 *$8 =$2 to the government in corporate taxes. That leaves $6 to distribute. However, you must pay 0.20 *$6 =$1.20 in income taxes on this amount, leaving $6 -$1.20 =$4.80 per share after all taxes are paid. As a shareholder you only end up with $4.80 of the original $8 in earn- ings; the remaining $2 +$1.20 =$3.20 is paid as taxes. Thus, your total effective tax rate is 3.20>8=40% .