Which corporate form is subject to a double layer of taxation?

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

Answer: (C)

Double taxation occurs when profits are taxed at the corporate level and again at the individual level when those profits are distributed as dividends. The form that experiences this is the C corporation: it pays corporate income tax on its earnings, and when those earnings are paid out as dividends to shareholders, they’re taxed again on the shareholders’ personal tax returns.

Other common business forms avoid this double layer because profits pass through to owners to be taxed on their personal returns, not at a separate corporate level. A sole proprietorship taxes business income once on the owner’s personal return. An S corporation is a pass-through entity, so profits are reported on shareholders’ tax returns and taxed there rather than at the corporate level. An LLC is typically treated as a pass-through for tax purposes as well (unless it elects to be taxed as a corporation), so it doesn’t incur a double tax in its standard form.