C and S-Corporations

Lesson

C and S-corporations are business entities that can be formed in the United States. We will explore the differences between these two types of corporations, their tax implications, and how they may suit different clients.

Practice Question #1

Which type of corporation is subject to double taxation?

A) C-corporation

B) S-corporation

C) Limited liability company

D) Partnership

Select an option above to see an explanation here.

A) C-corporations are subject to double taxation, as their profits are taxed at the corporate and individual levels. B) S-corporations avoid double taxation through pass-through taxation. C) Limited liability companies are not corporations and typically have pass-through taxation. D) Partnerships are not corporations and typically have pass-through taxation.

Terms

C-corporation:: A type of corporation taxed separately from its owners, with profits being taxed at the corporate level and dividends being taxed at the individual level.
S-corporation:: A type of corporation that avoids double taxation by passing its income, deductions, and credits through to its shareholders, who report this information on their individual tax returns.
Double taxation:: The taxation of a corporation's profits at both the corporate and individual levels.

Practice Question #2

What is the primary advantage of an S-corporation over a C-corporation?

A) Limited liability protection

B) Pass-through taxation

C) Lower corporate tax rates

D) Ability to issue dividends

Select an option above to see an explanation here.

A) Both C and S-corporations provide limited liability protection to their shareholders. B) Pass-through taxation is the primary advantage of an S-corporation, as it avoids double taxation. C) Corporate tax rates are not necessarily lower for S-corporations. D) Both C and S-corporations can issue dividends to their shareholders.

Do Not Confuse With

Sole proprietorship:: A business entity owned and operated by a single individual, with no legal distinction between the owner and the business.
Partnership:: A business entity where two or more individuals share ownership and management responsibilities.
Limited liability company (LLC):: A type of business entity that combines the limited liability protection of a corporation with the pass-through taxation of a partnership.

Practice Question #3

Which type of business entity combines the limited liability protection of a corporation with the pass-through taxation of a partnership?

A) C-corporation

B) S-corporation

C) Limited liability company

D) Sole proprietorship

Select an option above to see an explanation here.

A) C-corporations do not have pass-through taxation. B) S-corporations have limited liability protection and pass-through taxation but are not partnerships. C) Limited liability companies (LLCs) combine a corporation's limited liability protection with a partnership's pass-through taxation. D) Sole proprietorships do not provide limited liability protection.

Historical Example

In the 1980s, many businesses began to switch from C-corporations to S-corporations due to changes in tax laws that made S-corporations more attractive.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A small business owner who wants to protect her assets from potential business liabilities may choose to form an S-corporation. This would provide her with limited liability protection while avoiding double taxation on her business profits.