Which of the following is a disadvantage to incorporating a business?

• A. Unlimited liability for owners
• B. Lack of continuity if an owner leaves
• C. Double taxation of corporate profits
• D. Limited ability to raise capital

Answer: (C)

Verified step by step guidance

1. Understand the concept of incorporation: Incorporating a business means forming a separate legal entity (a corporation) that is distinct from its owners. This provides benefits such as limited liability for owners and continuity of the business even if an owner leaves.
2. Review the disadvantages of incorporation: While incorporation offers many advantages, it also has drawbacks. One major disadvantage is double taxation, where corporate profits are taxed at the corporate level and then taxed again when distributed as dividends to shareholders.
3. Analyze the incorrect options: Unlimited liability for owners is not a disadvantage of incorporation because owners of a corporation have limited liability. Similarly, lack of continuity if an owner leaves is not applicable to corporations, as they are designed to continue operating regardless of changes in ownership. Limited ability to raise capital is also incorrect, as corporations generally have greater ability to raise capital through issuing shares.
4. Focus on the correct answer: Double taxation of corporate profits is a key disadvantage of incorporation. This occurs because the corporation pays taxes on its earnings, and shareholders pay taxes on dividends received from those earnings.
5. Summarize the reasoning: Incorporation provides benefits like limited liability and continuity, but the disadvantage of double taxation makes it less appealing in certain situations. This is why 'Double taxation of corporate profits' is the correct answer.