Which statement best describes an S corporation?

• A. Has unlimited number of shareholders
• B. Taxed like a sole proprietorship or partnership
• C. Income is taxed at corporate level only
• D. It cannot allocate income to shareholders

Answer: (B)

An S corporation is taxed as a pass-through entity. This means the business itself doesn’t pay income tax on its profits. Instead, profits and losses flow through to the shareholders and are reported on their personal tax returns, so the income is taxed once at the owners’ individual tax rates. That mirrors how a sole proprietorship or partnership is taxed, avoiding the double taxation that occurs with a traditional C corporation.

So, the statement describing taxation as pass-through is the best match. It captures the essential tax treatment that distinguishes S corporations from C corporations, which are taxed at the corporate level and can face double taxation when profits are distributed. The other ideas don’t fit: S corporations do allocate income to shareholders, and they have restrictions on the number and type of shareholders; unlimited shareholders would describe a different structure, and corporate-level taxation describes C corporations rather than S corporations.