A business can be defined simply as any entity or individual running for profit. Businesses may be either for-profit or non-for-profit entities that conduct business to meet a social purpose or further a socially progressive cause. Companies can also be publicly or privately owned and operated. For the purpose of this discussion, any publicly traded company is subject to taxation under the Internal Revenue Code.
Businesses begin by generating revenue from sales of products or services to customers. Over time, these sales will generate profit. The value of a product or service does not diminish with time or decrease the value of money invested in producing it unless the revenue from business operations is reduced. Profits are derived from the sale of goods or services to customers and are usually reported quarterly in a profit and loss statement. Income from business operations can also be generated from the sale of assets and intangible assets such as goodwill and intangible property developed through research and development.
Allocating capital to buy and retain fixed assets, pay employees, and invest in business ventures can provide the company funds to make these investments and continue to grow. Individual stakeholders within a corporation also contribute to profits by receiving dividends or payments on stock ownership through the corporation. The profits, losses, and dividends of corporate social responsibility and governmental programs are reported by the shareholders in the annual report provided to the shareholders. When corporate social responsibility and government programs directly benefit a business’s bottom line, they receive additional benefits from an improved credit rating, investment in local community infrastructure, and reduction in regulations and taxes.
Many corporations and limited liability companies are domiciled in jurisdictions that have low or no corporate tax rates and unlimited exemption from local and state taxation. Corporations can be domiciled in any state, province, district, or country in the world, although some countries and states levy corporate tax at a higher rate than others. Taxation of personal income by corporations is different from the taxation of personal income by individuals because corporations are usually treated as pass-through entities meaning they are only liable for their own tax and nothing more.
Taxation of corporate income is based on several factors including the corporate form in which the corporation operates, whether it is a partnership limited liability company (LLC), or a corporation, and if it is a corporation, its members’ liability for the corporation’s debts. Business owners may be personally liable for the debts of the corporation if they are the majority stock holders in the business. A corporation’s assets consist of the equity (equity held by the corporation’s members) and the retained earnings, either retained earnings acquired through the use of retained funds or retained earnings earned by the operation of the business. Residuals consist of the profits, less outstanding capital, and the difference between the current value of the corporation’s assets and its liabilities.
Corporate taxes are different from individual income taxes because the corporation is formed as an entity separate from its owners and is not actually “domiciled” in the individual’s name. Corporations are subject to U.S. corporate laws and must register with the IRS before they can receive tax exempt status. If a corporation does not pay the required tax, it will lose its tax exempt status and will lose its ability to receive federal assistance, such as grants and scholarships. If a corporation does pay the tax, however, it may still be able to claim exemption due to the corporation’s capacity to cover the tax through dividends paid to shareholders.
