Which method of organizing a business entity may result in double taxation?

In a C corporation, the business is treated as a separate legal entity from its owners (shareholders) for tax purposes. As a result, the corporation itself pays taxes on its profits at the corporate tax rate. When the corporation distributes its profits to shareholders in the form of dividends, those dividends are also taxed at the individual tax rates of the shareholders. This creates what is known as "double taxation," where the same income is taxed once at the corporate level and again at the individual level when profits are distributed.

The other business entities listed do not typically experience double taxation. Subchapter S corporations allow income to pass through directly to shareholders, who report it on their personal tax returns. Limited liability companies (LLCs) also offer pass-through taxation, where profits are only taxed at the member level, avoiding corporate taxation altogether. General partnerships similarly provide pass-through taxation to partners.

Understanding the implications of double taxation is crucial for business owners when deciding on the best entity structure for their needs, especially when considering the potential impact on overall tax liabilities.