Arizona State Board Nail Technology Practice Exam

What type of business structure allows taxation like a sole proprietorship or partnership?

1. S Corporation

2. C Corporation

3. Limited Liability Company (LLC)

4. General Partnership

The correct answer is: S Corporation

The correct answer is that an S Corporation allows for taxation similar to a sole proprietorship or partnership. This taxation model is known as "pass-through taxation," where the income of the corporation is passed directly to the shareholders, who then report it on their personal tax returns. This structure eliminates the double taxation that can occur with C Corporations, where the corporation is taxed on its profits, and then shareholders are taxed again on dividends. In contrast, while a Limited Liability Company (LLC) also provides pass-through taxation benefits, it is not classified as a corporation in the same manner as an S Corporation. An LLC offers flexibility in terms of management and the number of members, meaning it can be taxed as a sole proprietorship, partnership, or corporation depending on its configuration and member elections. C Corporations are subject to corporate income tax, and their profits are taxed separately from their owners, which does not align with the pass-through taxation model. A General Partnership also allows for pass-through taxation, similar to S Corporations, but it does not provide the same limited liability protections. Therefore, while both S Corporations and General Partnerships share similarities in taxation, the specific nature of an S Corporation's structure makes it the better answer in this context regarding corporate