Dividends can only be paid out of profits, to avoid disadvantaging creditors. Before 1986 company profits were taxed twice. Since the introduction of dividend imputation in 1986, dividends that have been paid out of profits for which the company tax has been paid, carry a tax credit equivalent to the company tax paid. These tax credits are not available to all shareholders. Many firms are organised as companies for tax minimisation reasons.
Companies make income splitting easier.
You Earn tax a lot easier for individuals. Many tax deductions are easier to substantiate for corporations than non-incorporate bodies. Because dividends can not be paid out of capital, it is important that a company separate its owner's equity accounts into those associated with capital contributions, and those resulting from the profits earned by the firm. Firstly let us look at the accounting entries required to form a company. Capital Accounts Authorised Capital - This is not normally an actual account, but a calculation.