Which type of corporation is subject to a double layer of taxation, meaning both the corporation and its shareholders are taxed on earnings?

• A. Partnership
• B. S Corporation
• C. Limited Liability Company (LLC)
• D. C Corporation

Answer: (D)

Verified step by step guidance

1. Understand the concept of double taxation: Double taxation occurs when the same income is taxed at two different levels. In the case of corporations, this means the corporation pays taxes on its earnings, and then shareholders pay taxes on dividends received from those earnings.
2. Review the characteristics of each type of entity: Partnerships, S Corporations, and LLCs are generally pass-through entities, meaning their income is taxed only at the individual level, avoiding double taxation. C Corporations, however, are taxed at both the corporate level and the shareholder level.
3. Identify the tax treatment of a C Corporation: A C Corporation is a separate legal entity that pays corporate income tax on its profits. When these profits are distributed as dividends to shareholders, the shareholders also pay personal income tax on the dividends.
4. Compare the tax treatment of other entities: Partnerships, S Corporations, and LLCs typically pass their income directly to the owners, who report it on their personal tax returns. This avoids the corporate-level tax, making them single-taxation entities.
5. Conclude that the correct answer is C Corporation: Based on the explanation above, C Corporations are subject to double taxation, making them distinct from the other types of entities listed.