Double taxation is a disadvantage of which business structure?

Double taxation is a disadvantage of which business structure?

• A. Sole Proprietorship
• B. Limited Liability Company
• C. C Corporation
• D. Partnership

Answer: (C)

The concept being tested is how business incomes are taxed across different legal forms. A C corporation is taxed as a separate entity on its profits, and shareholders are taxed again on any dividends they receive, so the same earnings face taxation twice. In contrast, sole proprietorships and partnerships pass profits through to owners to be taxed only once on their personal returns. An LLC typically acts as a pass-through entity for tax purposes unless it elects to be taxed as a corporation, in which case double taxation can occur only if that election is chosen. So the structure with the disadvantage of double taxation is the C corporation.

The concept being tested is how business incomes are taxed across different legal forms. A C corporation is taxed as a separate entity on its profits, and shareholders are taxed again on any dividends they receive, so the same earnings face taxation twice. In contrast, sole proprietorships and partnerships pass profits through to owners to be taxed only once on their personal returns. An LLC typically acts as a pass-through entity for tax purposes unless it elects to be taxed as a corporation, in which case double taxation can occur only if that election is chosen. So the structure with the disadvantage of double taxation is the C corporation.