What is a primary tax advantage of a sole proprietorship compared with a corporation?

What is a primary tax advantage of a sole proprietorship compared with a corporation?

• A. It Limits Liability
• B. It Avoids Double Taxation
• C. It Has Perpetual Existence
• D. It Allows Easier Capital Raising

Answer: (B)

A sole proprietorship is taxed as a pass-through entity, so the business’s profits or losses flow directly to the owner’s personal tax return and are taxed only once at the individual’s rate. There’s no separate corporate tax, and distributions aren’t taxed again at the corporate level. This avoids the double taxation that can occur with a corporation, where profits can be taxed at the corporate level and again when distributed as dividends to shareholders. That is why the primary tax advantage is the absence of double taxation. The other points—limited liability, perpetual existence, and easier capital raising—pertain to liability, continuity, and funding—not to how the entity is taxed.

A sole proprietorship is taxed as a pass-through entity, so the business’s profits or losses flow directly to the owner’s personal tax return and are taxed only once at the individual’s rate. There’s no separate corporate tax, and distributions aren’t taxed again at the corporate level. This avoids the double taxation that can occur with a corporation, where profits can be taxed at the corporate level and again when distributed as dividends to shareholders. That is why the primary tax advantage is the absence of double taxation. The other points—limited liability, perpetual existence, and easier capital raising—pertain to liability, continuity, and funding—not to how the entity is taxed.