Which of the following is a disadvantage of a corporation compared to a sole proprietorship or partnership?

• A. Double taxation of corporate earnings
• B. Lack of legal entity status
• C. Limited ability to raise capital
• D. Unlimited liability for owners

Answer: (A)

Verified step by step guidance

1. Understand the key characteristics of a corporation, sole proprietorship, and partnership. A corporation is a separate legal entity, meaning it has legal entity status, limited liability for owners, and the ability to raise capital by issuing shares. Sole proprietorships and partnerships do not have these features.
2. Review the concept of double taxation. Corporations are subject to double taxation because corporate earnings are taxed at the corporate level, and any dividends distributed to shareholders are taxed again at the individual level. Sole proprietorships and partnerships avoid this because their earnings are taxed only once at the owner's personal income tax level.
3. Analyze the other options provided in the question. Lack of legal entity status is not a disadvantage of a corporation because corporations are legally recognized entities. Limited ability to raise capital is also not a disadvantage of corporations, as they can issue shares to raise funds. Unlimited liability for owners is not applicable to corporations, as shareholders have limited liability.
4. Compare the disadvantages of corporations with those of sole proprietorships and partnerships. Sole proprietorships and partnerships may face challenges such as unlimited liability for owners and limited ability to raise capital, but they avoid double taxation.
5. Conclude that the correct answer is 'Double taxation of corporate earnings,' as this is a unique disadvantage of corporations compared to sole proprietorships and partnerships.