Which legal entity is subject to double taxation?

The correct choice of a legal entity that is subject to double taxation is a corporation. This occurs because a corporation is considered a separate legal entity from its owners, which means it pays taxes on its profits at the corporate level. After these profits are distributed to shareholders in the form of dividends, the shareholders also must pay personal income taxes on those dividends. This results in the same income being taxed twice—once at the corporate level and again at the individual level when distributions are made to shareholders.

In contrast, partnerships and sole proprietorships are not structured to face double taxation. Instead, their income is passed through to the individual owners, who pay taxes on it at their personal income tax rates. Limited liability companies (LLCs) can elect how they wish to be taxed, either as a pass-through entity like a partnership or, if they choose, as a corporation. This flexibility often helps LLCs avoid the double taxation that corporations face, depending on how the entity is set up and the tax elections made.