National Evaluation Series (NES) Business Studies Practice Test

Which type of business entity is subject to double taxation?

1. Sole proprietorship

2. Partnership

3. C corporation

4. S corp

The correct answer is: C corporation

The concept of double taxation primarily applies to C corporations. This occurs because the corporation is taxed on its earnings at the corporate tax rate, and then shareholders are taxed again when dividends are distributed to them. This two-tiered taxation structure is characteristic of C corporations, making them distinct in how they handle taxation compared to other business entities. In contrast, sole proprietorships and partnerships are generally subject to pass-through taxation, meaning the income is reported on the owners' personal tax returns, avoiding the double taxation scenario. S corporations, while they can have some complexities, also typically enjoy pass-through taxation, which means they are generally not subject to double taxation as long as they meet certain requirements. Thus, the correct answer highlights the unique tax implications associated with C corporations, which are important for understanding various business structures and their tax liabilities.