Entity & Tax

One dollar, two doors: double tax and pass-through, worked honestly

"Double taxation" sounds like a penalty and "pass-through" sounds like a loophole. Neither is true. They are two timing designs for the same dollar, and for a non-citizen each carries a wrinkle the generic explainers skip.

prepared 27 August 2026 · publication gated on CPA / tax-attorney validation

Start with one dollar of business profit and follow it to its owner.

Through a C corporation, the company pays corporate income tax first. The federal corporate rate is currently a flat 21 percent, so the dollar becomes 79 cents inside the company. If the company then distributes that 79 cents as a dividend, the shareholder pays tax on the dividend, at rates that depend on the shareholder's situation. Assume, purely for illustration, a 15 percent dividend rate: the owner keeps about 67 cents. Two layers, two moments, less money, and one important power: the second layer only happens when the company chooses to distribute. Profit the company keeps and reinvests has paid only the first layer so far.

Through a pass-through (a partnership, a default LLC, or an S corporation where available), the company itself pays no federal income tax on the dollar. The dollar is allocated to the owner and taxed once, at the owner's own rate, in the year it is earned. Assume, again for illustration, a 32 percent personal rate: the owner keeps 68 cents. One layer, but with the timing reversed: the tax is due when the profit is earned, whether or not any cash was actually distributed. Owners meet this the first year a growing company reinvests everything and the K-1 arrives anyway. The profit was taxed; the cash never moved. People call it phantom income, and it is not a trick, it is the design.

So the honest one-line comparison is: the C corporation usually costs more tax in total but lets the company control when the second layer lands; the pass-through usually costs less tax in total but sends the bill to the owner every year, cash or no cash. Which design fits depends on whether profits will be distributed or reinvested, and on the owner's own rates, which is exactly why this is a planning conversation and not a rule of thumb.

Now the two wrinkles for this library's reader.

First, the pass-through door is not fully open to everyone. The S corporation version of it has the shareholder eligibility condition covered in its own piece. And income passing through to a foreign owner can trigger withholding obligations at the entity level that domestic owners never see.

Second, dividends crossing the border behave differently. A dividend paid to a nonresident alien is generally subject to a flat 30 percent withholding, unless a tax treaty between the United States and the owner's country reduces it. Whether a treaty applies, and at what rate, is a fact about the owner, not about the company, and it can change the C corporation arithmetic materially for an owner who is abroad or planning to be.

The rates in the example above are assumptions chosen for round numbers, except the 21 percent corporate rate, which is the current federal statute. Your rates are facts about you.