Final answer:
A corporation that elects to be a pass-through entity, such as an S corporation, avoids double taxation as profits go directly to shareholders who then report them on their personal tax returns, benefiting from limited liability.
Step-by-step explanation:
A corporation that elects the IRS to be treated as a pass-through entity for income tax purposes is known as an S corporation or S corp. This business structure allows corporations to avoid double taxation, once at the corporate level and once at the individual level, by passing profits directly to shareholders who then report it on their tax returns. Due to the legal structure of a corporation, the owners have limited liability, which means they are not personally responsible for the company's debts.
Corporate income taxes are a major source of revenue for the federal government, making the topic of how corporations are taxed quite significant. The ability of certain corporations to elect pass-through status can have a notable impact on both the owners' tax obligations and the tax revenues collected by the government.