What is double taxation, and which form(s) face it?

• A. Double taxation means corporate profits are taxed at the corporate level and shareholder dividends are taxed at the shareholder level; primarily C corporations.
• B. It refers to taxation paid only by owners at personal tax rates, with no corporate tax.
• C. It happens when a business is taxed only once at the entity level.
• D. It occurs when a business pays sales tax on revenue and income tax on profits.

Answer: (A)

Double taxation means profits are taxed twice: first at the corporate level on the company’s earnings, and then again at the shareholder level when those earnings are distributed as dividends. This setup occurs primarily with C corporations, which are separate taxable entities. The profits are taxed once when the company earns them, and again when shareholders receive dividend income on which they must pay personal tax. Other business forms, like S corporations or LLCs that elect pass-through taxation, typically avoid this double layer because profits flow through to owners and are taxed only on their personal returns. The other scenarios describe single taxation, no corporate tax, or a mix with sales tax, none of which capture the double-tax situation that characterizes C corporations.