Alabama Contractors License Practice Exam

Which benefit is associated with an S Corporation?

1. Prevent double taxation

2. Direct control

3. No shareholders

4. Limit liability

The correct answer is: Prevent double taxation

An S Corporation offers the significant benefit of preventing double taxation. In a traditional C Corporation, income can be taxed at both the corporate level and again at the individual level when dividends are distributed to shareholders. However, S Corporations are structured to allow income, losses, deductions, and credits to flow through directly to the shareholders' personal tax returns. This means that the corporate income is taxed only once, at the individual level, thereby minimizing the overall tax burden on the business owners. This single layer of taxation makes S Corporations a popular choice for many small businesses seeking to avoid the complexities and increased tax liabilities associated with C Corporations. While options like direct control, lack of shareholders, and limited liability have their own merits, they do not specifically relate to the unique tax treatment of S Corporations, making the prevention of double taxation the defining benefit of this business structure.