Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

Which corporate form can provide pass-through tax treatment for shareholders?

1. LLC

2. C-Corporation

3. S-Corporation

4. Partnership

The correct answer is: LLC

The correct answer is that an S-Corporation provides pass-through tax treatment for shareholders. In a pass-through entity, the business itself does not pay income taxes. Instead, the income, deductions, and tax credits flow through to the shareholders' personal tax returns, where they are taxed at individual income tax rates. This structure allows for avoiding the double taxation often seen in C-Corporations, where the corporation pays taxes on its income and shareholders pay taxes again on dividends received. While LLCs can also provide pass-through taxation, the S-Corporation has specific IRS regulations and guidelines that define it separately, including limitations on the number and type of shareholders. Partnerships also have pass-through tax treatment, but they differ in structure and ownership requirements. The C-Corporation, on the other hand, does not allow for pass-through taxation as it is taxed separately from its owners, leading to potential double taxation on corporate income and dividends paid to shareholders.