Utah Contractor Practice Exam

Which corporate structure has a crucial drawback of double taxation?

1. S corporation

2. C corporation

3. LLC

4. Sole proprietorship

The correct answer is: C corporation

The concept of double taxation is primarily associated with the C corporation structure. In this form of corporate organization, the income generated by the corporation is taxed at the corporate level. When profits are subsequently distributed to shareholders as dividends, those dividends are taxed again at the individual level. This results in the same earnings being taxed twice, hence the term "double taxation." This framework is crucial for understanding how profits and taxation work in corporate settings, especially when compared to other structures. For instance, in an S corporation, profits and losses pass through to the individual shareholders' personal tax returns, thereby avoiding the double taxation scenario. Similarly, LLCs and sole proprietorships also benefit from pass-through taxation, where the income is only taxed once at the individual level. This distinction is important for contractors and those in the construction business who are considering the implications of different corporate structures on their taxation and overall financial strategy. Understanding the repercussions of double taxation can influence decisions on how best to structure a business for both liability and tax efficiency.