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CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership

A profitable corporation pays tax on its earnings and then distributes dividends to shareholders, who pay personal tax on those dividends. A pass-through entity, such as a partnership, differs most likely because its:

A pass-through entity such as a partnership is most likely taxed at the owner level, avoiding a separate entity-level tax on profits. A corporation's earnings are taxed at the company level and again when paid as dividends, which creates the double taxation problem.

  1. Aincome is taxed at the owner level, avoiding entity-level tax on profitsCorrect
  2. Bowners cannot receive distributions of profits
  3. Cprofits are taxed twice at higher rates

Explanation

Corporations face double taxation: entity-level tax and then shareholder tax on dividends. In a pass-through entity, profits flow to the owners and are taxed once at the owner level. The other options misstate the treatment of distributions and taxes.

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