Question

Which of the following statements describes the corporate characteristic termed double taxation?

A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.

B) Shares of stock can be readily bought and sold by investors on the open market.

C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation

D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock

Answer 1

Double taxation implies tax on tax. If the corporate pays tax on their earnings, tax has been levied on such earnings. When these earnings are distributed to shareholders in the form of dividends and the dividends are taxed in the hands of shareholders, then earnings have been double taxed.

Hence the corporate characteristic termed double taxation can be described by the payment of income tax by corporate on earnings and payment of personal tax on corporate dividends by shareholders.

Correct Option is D) Corporations pay Income Tax on Corporate Earnings and Shareholders pay Personal Income Tax on Corporate Dividends and Gains from Sale of Stock.