My understanding is that the low nominal tax on dividends is on top of the high corporate tax, which is 35%, so that dividends are taxed at a higher rate than earned income.
Yes, it is on top of the 35%. However, the 35% is on pure profit -- if the business has more expenses, the profit goes down and there is less tax. Whereas, if it was earned income, there are much fewer relevant deductions.
Also, being a corporate does indeed cost that 35% corporate tax - however, it does limit the shareholder, director and officer liability. If the corporate structure wasn't there, these people would have to arrange for e.g. insurance - and the overall cost would be at least as high.
I would infer from the fact that most small business owners choose the "limited liability" path, that the overall cost (corporate tax + dividend tax) is worth the limited liability. It might, in fact, be too cheap for what it provides.
The LLC form provides the best of both: limited legal liability, while eliminating the double taxation burden. This is one of the reasons the form has been taking off over the past 2 decades, especially for small businesses.
Yes, it is on top of the 35%. However, the 35% is on pure profit -- if the business has more expenses, the profit goes down and there is less tax. Whereas, if it was earned income, there are much fewer relevant deductions.
Also, being a corporate does indeed cost that 35% corporate tax - however, it does limit the shareholder, director and officer liability. If the corporate structure wasn't there, these people would have to arrange for e.g. insurance - and the overall cost would be at least as high.
I would infer from the fact that most small business owners choose the "limited liability" path, that the overall cost (corporate tax + dividend tax) is worth the limited liability. It might, in fact, be too cheap for what it provides.