Oregon Construction Contractors (CCB) Practice Test

Which type of corporation offers limited liability and taxation benefits?

1. S Corporation

2. Partnership

3. Non-Profit Corporation

4. General Corporation

The correct answer is: S Corporation

The S Corporation is designed to provide both limited liability and tax advantages. Limited liability means that the personal assets of the shareholders are protected from the debts and liabilities of the corporation, which is a significant benefit when compared to other business structures. In terms of taxation, S Corporations are classified as pass-through entities. This means that the corporation itself does not pay federal income tax; instead, the income is passed through to the shareholders, who report it on their individual tax returns. This avoids the double taxation that occurs in traditional C Corporations, where profits are taxed at the corporate level and again at the individual level when dividends are distributed. Other types of business entities do not offer the same combination of advantages. Partnerships, for example, also have pass-through taxation but do not provide limited liability protection without forming a limited liability partnership (LLP). Non-Profit Corporations serve a different purpose, focusing on charitable, educational, or other nonprofit motives, and do not distribute profits to shareholders, thus not falling under the traditional concept of limited liability in the same context. General Corporations may offer limited liability but do not have the same tax benefits as S Corporations, as they are subject to double taxation.