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If a manager signs a contract with a strict provision prohibiting the manager from competing against this company if the manager leaves the company, what type of agency cost is this provision?
The U.S. tax code allows the creation of a taxable entity known as an S corporation. According to the Internal Revenue Service (www.irs.gov/businesses/small/article/0,,id=98263,00.html):
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
Corporations that do not elect to be treated as S corporations are called C corporations.
a. How does income get taxed twice in the case of a C corporation?
b. The shareholders of an S corporation are still entitled to limited liability in the case of bankruptcy of the corporation. What are the advantages of being an S corporation if an entity can qualify to do so?