Which statement is a disadvantage of forming a C-Corporation?

• A. Double taxation
• B. It has no liabilities
• C. It is simple to dissolve
• D. It avoids double taxation

Answer: (A)

Double taxation describes a major drawback of forming a C-Corporation. The company first pays corporate income tax on its profits. Then, if those profits are distributed to shareholders as dividends, the shareholders pay personal income tax on the same earnings. That two-layer tax reduces after-tax returns and can influence decisions about retaining earnings versus distributing profits.

In contrast, the idea that there are no liabilities isn’t accurate—corporations are separate legal entities that can incur debts and face lawsuits. The notion that it’s simple to dissolve isn’t a defining advantage and, in practice, dissolution can be complex and costly. And the idea that it avoids double taxation isn’t correct for a C-Corporation; that characteristic is more associated with pass-through entities like certain partnerships or S-corporations.