I've often read opinions about taxation advantages of converting a personal business to a company but a point which confuses me is wouldn't the lower corporate tax rate be offset by the income tax when the company pays the "owner" shareholder?
Of course, this will change from nation to nation so for concreteness let's imagine this situation:
Let's see we have a individual consultant Mister Badger make an income of 100,000 USD per year. Imagine the corporate tax is 20% and personal income tax at that tax bracket is 30%. So effectively Mister Badger pays 30,000 as taxes and is left with a net income of 70,000 (to buy pizza and drink beer from)
Now if Mister Badger decides to incorporate, the new company Badger Consulting ends up getting the revenue stream of 100,000 and pays a tax of 20,000 on it. Which is great since its 10,000 less than the tax Mister Badger would have paid had he not formed a company.
But shouldn't the remaining 80,000 somehow move from Badger Consulting to Mister Badger? And at that point won't it get an income tax on it? Assuming it's still a 30% bracket, he pays another 24,000?
How is forming a company then a good idea from the taxation viewpoint? He ended up paying 20k+24k=44k versus the 30k he would have paid had he not incorporated.
I am assuming that the mode of transfer of 80,000 from Badger Consulting to Mister Badger would be as dividend? Is the dividend tax free from Income tax (say in the US)?
PS. I am implicitly assuming that the deductions for expenses would be same in both cases, approximately.
PS. Of course, there are other non-taxation advantages of incorporation. But let's stick to taxation.
