Contractor License Practice Exam

If a corporation opts to be taxed as a partnership, what is it referred to?

1. Limited Partnership

2. Corporation

3. S Corporation

4. Sole Proprietorship

The correct answer is: S Corporation

When a corporation chooses to be taxed as a partnership, it is referred to as an S Corporation. This designation allows the corporation to bypass double taxation on corporate income, as the income, deductions, and tax credits flow through to the shareholders. In this way, the corporation itself does not pay federal income taxes, similar to a partnership. Instead, the individual shareholders report their proportionate share of income and losses on their personal tax returns, thus only being taxed at the individual level. This structure is particularly advantageous for many small businesses, as it provides the limited liability protections of a corporation while allowing for a more favorable tax treatment. The S Corporation status requires the corporation to meet specific criteria set forth by the IRS, including limits on the number of shareholders and the types of allowable shareholders. This unique tax treatment is one of the key features that distinguishes S Corporations from other business entities.