Question

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

a. Sole proprietorship
b. C corporation
c. S corporation
d. Limited liability company (LLC)

Answer 1

c. S corporation becuase it avoids double taxation because of its unique tax structure.

Step-by-step explanation:

S corporations are not subject to double taxation at the corporate and shareholder level. Instead, they follow a pass-through taxation model, where the company's profits pass directly to the shareholders' individual tax returns, avoiding taxation at the corporate level.

This structure enables S corporations to bypass the double taxation that C corporations typically face. Sole proprietorships, while they don't face double taxation, aren't separate entities from their owners, and their earnings are directly taxed at the individual level.

C corporations undergo double taxation as profits are taxed at the corporate level and then again when distributed as dividends to shareholders. Limited liability companies have flexibility in taxation, but by default, they face taxation at both the corporate and individual levels unless they elect to be taxed as an S corporation or partnership.

Thus, the option c. S corporation stands out as a structure that mitigates double taxation, making it an attractive option for many businesses seeking tax efficiency while maintaining limited liability protection.