Louisiana Contractors License Practice Exam

What is the unique feature of an S Corporation?

1. It can have foreign shareholders.

2. It avoids double taxation by passing income, loss, and deductions through to shareholders.

3. It restricts ownership to government entities.

4. It must pay corporate taxes on profits.

The correct answer is: It avoids double taxation by passing income, loss, and deductions through to shareholders.

The unique feature of an S Corporation lies in its ability to avoid double taxation by passing income, loss, and deductions directly through to its shareholders. This means that the corporation itself does not pay corporate income taxes; instead, the income is reported on the personal tax returns of the shareholders. As a result, profits are only taxed at the individual level, which can lead to a lower overall tax burden for the owners compared to C Corporations, which face taxation at both the corporate and shareholder levels. In comparison, while some corporations can have foreign shareholders, it is important to note that S Corporations are restricted to U.S. citizens and resident aliens. Moreover, ownership restrictions apply due to the requirement that an S Corporation must have no more than 100 shareholders, none of whom can be non-resident aliens. The notion that an S Corporation restricts ownership to government entities is inaccurate, as ownership is typically held by individuals or certain types of trusts. Finally, S Corporations do not pay corporate taxes on profits; instead, taxes are passed through to shareholders, distinguishing them from other corporate structures that do incur corporate tax obligations.