What about Double Taxation? I am often asked, "Why do you recommend C-Corporations instead of S-Corporations or LLC corpora- tions? Why do you want to be subject to double taxation?" Double taxation occurs, when a corporation is taxed on its income and then when it declares a dividend to its sharehold- ers they are taxed on the dividend. The same thing can occur when an improperly structured sale of a corporation occurs and a liquidity dividend is declared. The dividend is not de- ductible to the corporation but is taxable to the shareholder. The Sophisticated Investor 269 Therefore, that income is taxed at both the corporate and in- dividual level. Business owners often increase their own salaries to re- duce or wipe out corporate profits and thereby eliminate the possibility of having those profits taxed twice. Alternatively, as the corporation continues to grow, the retained profits are used to expand the business and help it grow. (In the United States, a C-Corporation must justify this accumulation of earn- ings or it will become subject to the Accumulated Earnings Tax.) There is no double taxation unless dividends are de- clared. I personally like C-Corporations because I believe they provide the maximum flexibility. I always look at the big pic- ture. When I start a business, I expect it to become a big busi- ness. Most big businesses today are C-Corporations (or the equivalent in other countries). I grow businesses because I want to sell them or take them public, not receive dividends. Sometimes, I choose a different entity for a business. For example, I just formed an LLC with partners so that I could buy a building. You should consult with your financial and tax advisors to determine the appropriate structure for your situation. Timing Rich dad would describe the T as timing. "Timing is impor- tant because ultimately, we all need to pay taxes. Paying taxes is an expense of living in a civilized society. The rich want to control how much they pay in taxes as well as when they have to pay them." Understanding the law helps in controlling the timing of paying taxes. For instance, Section 1031 of the U.S. Tax Code allows you to "roll over" your gain in investment real estate if you buy another property at a greater price. This allows you 270 Rich Dad's Guide to Investing to defer paying taxes until the second property is sold (or you may choose to roll it over repeatedly-perhaps forever!). Another important timing issue is provided by the C-Corporation status. C-Corporations can elect a different year-end for tax and accounting purposes (such as June 30, for instance) than December 31, which is required for most individuals, partnerships, S Corporations, and LLC Corpo- rations. This allows for a certain amount of strategic tax plan- ning as to the timing of distributions between corporations and to individuals.