Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

What is a primary difference between C Corporations and S Corporations?

1. Ownership Structure

2. Taxation

3. Liability Exposure

4. Business Purpose

The correct answer is: Taxation

The primary difference between C Corporations and S Corporations lies in their taxation treatment. C Corporations are taxed as separate entities at the corporate level, leading to what's commonly referred to as "double taxation." This means that the corporation pays taxes on its earnings, and then shareholders also pay taxes on dividends received. In contrast, S Corporations are designed to avoid this double taxation by allowing income, losses, deductions, and credits to pass through directly to shareholders. This allows shareholders to report the income and losses on their individual tax returns and pay taxes at their personal income tax rates. This structure benefits smaller businesses and helps to avoid the Corporations paying federal taxes at both the corporate and individual levels. Other options refer to important aspects of corporate structure, such as ownership structure and liability exposure, but these do not fundamentally differentiate C Corporations from S Corporations in terms of how they are taxed. The business purpose may vary among corporations but does not serve as a primary distinction between these two types. Therefore, taxation is indeed the most significant and defining difference.