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Income Tax Rates

April 13, 2006

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When comparing the limited liability company (LLC) and the corporation, there are tax implications for each organizational form based on your personal tax situation.

Both individual and corporate tax rates start at 10 or 15 percent and approach a top rate of nearly 40 percent, although the levels of income that are subject to each rate vary in each tax schedule. Whether your taxes on a given level of income would be lower in the LLC at the individual rates or in the corporation at the corporate rates will depend on a number of factors, including your filing status, personal and dependency exemptions, and your other sources of income.

(For more information on income taxes and your small business, see our in-depth discussion.)

Of course, when earnings are being distributed by the corporation as a deductible salary to the business owner, the corporate earnings will be reduced to zero and, instead, taxed at the individual level anyway. This is a likely scenario in the small business corporation, as the owner seeks to avoid double taxation of dividends. If the earnings are distributed in a non-tax-deductible way (i.e., through the payment of dividends), the owner will experience the problem of double taxation of dividends.

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