Taxes on Corporations Compared to Partnerships
Corporations and partnerships are two of the four main business structures in the United States along with limited liability companies, and sole proprietorships. The Internal Revenue Service has given each of these two business structures its own tax classification. While corporations pay taxes at special tax rates, partnerships do not have to pay federal income taxes on company profits.
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Corporate Tax Rates
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A corporation is considered a separate entity from its owners. It is treated as its own person; a corporation can be sued or file for bankruptcy, and its owners are not held personally liable for company debts or lawsuits. A corporation files taxes at corporate tax rates that are less than individual federal income tax rate. For example, in 2011, the tax rate for corporations making up to $50,000 is 15 percent while single taxpayers making the same amount have to pay 25 percent of their earnings to the IRS.
Double Taxation
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The major downside of filing taxes as a corporation is double taxation. This happens because company profits are taxed once at the corporate level. Taxed profits are distributed to the company's shareholders, who report it as incomes on their individual tax returns. Company profits are taxed a second time, thus creating double taxation.
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Pass-Through Taxation
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Filing taxes under the partnership classification has some tax advantages over the corporate classification. There is no double taxation of company profits like corporations. In fact, business profits are not taxed at the company level at all. Company profits are taxed through a process called pass-through taxation. Company profits and losses are shared and passed through onto the partners, who report their earnings on their individual tax returns.
Self-Employment Tax
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Besides paying local, state and federal income taxes on their distributions, partners also have to pay self-employment taxes. These cover Medicare and Social Security. Because taxes are not withheld from partners since they're not employees of the company, the IRS encourages them to pay estimated taxes throughout the year if they're expecting to make profits.
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