Which business entity is taxed on corporate income and also has shareholders taxed on dividends?

A C corporation is the correct choice because it operates under a system known as double taxation. This means that the corporation itself is first taxed on its earnings at the corporate tax rate. Then, when the corporation distributes dividends to its shareholders, those dividends are taxed again at the individual level. This results in shareholders incurring a personal tax obligation on the income they receive from dividends, in addition to the taxes the corporation has already paid on its profits.

In contrast, an S corporation does not face double taxation. Instead, it passes its income through to shareholders, who report it on their personal tax returns, avoiding corporate-level taxation. Partnerships also do not pay taxes at the entity level; instead, partners are taxed on their share of the partnership income. Similarly, Limited Liability Companies (LLCs) typically enjoy pass-through taxation, where income is reported by the owners on their personal tax returns without facing taxation at the entity level.

This distinguishes C corporations clearly in the taxation landscape, making them subject to both corporate income tax and personal taxation of dividends.