What sets an S corporation apart from a C corporation?

What sets an S corporation apart from a C corporation?

• A. An S corporation is publicly traded while a C corporation is not
• B. An S corporation is taxed at the corporate level while a C corporation is not
• C. Profits in an S corporation pass through to shareholders to avoid double taxation
• D. An S corporation can have unlimited shareholders while a C corporation cannot

Answer: (C)

The distinguishing feature of an S corporation that sets it apart from a C corporation is indeed the way profits are taxed. In an S corporation, profits "pass through" to the shareholders. This means that the income generated by the S corporation is reported on the personal tax returns of the shareholders, allowing them to avoid the double taxation that typically affects C corporations. In a C corporation, the entity pays corporate income tax on its profits, and then shareholders also pay taxes on dividends received from those profits. This double layer of taxation is a critical difference between these two types of corporate structures. This characteristic of an S corporation allows for a more advantageous tax situation for many small business owners, making it an appealing choice for entities that meet the qualifications to elect S corporation status. Additionally, S corporations have restrictions on the number and type of shareholders, further differentiating them from C corporations, which can have an unlimited number of shareholders and are often publicly traded.

The distinguishing feature of an S corporation that sets it apart from a C corporation is indeed the way profits are taxed. In an S corporation, profits "pass through" to the shareholders. This means that the income generated by the S corporation is reported on the personal tax returns of the shareholders, allowing them to avoid the double taxation that typically affects C corporations. In a C corporation, the entity pays corporate income tax on its profits, and then shareholders also pay taxes on dividends received from those profits. This double layer of taxation is a critical difference between these two types of corporate structures.

This characteristic of an S corporation allows for a more advantageous tax situation for many small business owners, making it an appealing choice for entities that meet the qualifications to elect S corporation status. Additionally, S corporations have restrictions on the number and type of shareholders, further differentiating them from C corporations, which can have an unlimited number of shareholders and are often publicly traded.