Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is a notable disadvantage of a C Corporation?

1. High flexibility in management

2. Double taxation on profits

3. Limited to real estate investments

4. No tax advantages available

The correct answer is: Double taxation on profits

Double taxation on profits is a significant disadvantage of a C Corporation. This structure means that the corporation itself is taxed on its income at the corporate tax rate, and then shareholders are also taxed on any dividends they receive from the corporation. As a result, the same income is effectively taxed twice—first at the corporate level and again at the individual level when distributed as dividends. This can reduce the overall profitability for the shareholders and is a key consideration for businesses considering the C Corporation structure. The other options highlight different characteristics of C Corporations rather than disadvantages. For instance, while C Corporations do allow for flexible management structures, they can also involve more regulatory requirements. The point about being limited to real estate investments is inaccurate, as C Corporations can operate in a broad range of industries. Lastly, while there are tax obligations, C Corporations can also enjoy various tax advantages and deductions that might not be available to other business structures. Thus, the double taxation of profits stands out as a notable disadvantage specific to C Corporations.