Future Business Leaders of America (FBLA) Agribusiness Practice Test

What happens to the income of a close corporation?

1. It is heavily taxed before reaching shareholders

2. It is lost in management costs

3. It is transferred to shareholders in its original form

4. It cannot be distributed to shareholders

The correct answer is: It is transferred to shareholders in its original form

In a close corporation, income is typically transferred to shareholders in its original form. This means that the profits generated by the business can be distributed directly to the owners without undergoing any significant changes. Close corporations often have a limited number of shareholders and may operate under different tax structures compared to larger corporations, such as S corporations. This ability to transfer income directly helps close corporations maintain a more straightforward financial structure, allowing shareholders to benefit from the company's profits more directly than in other corporate forms where income might be retained for reinvestment or face additional taxation before distribution. The nature of a close corporation facilitates this straightforward distribution, fostering a direct relationship between the corporation’s profits and its owners. Being able to distribute income without heavy taxation or considerable administrative costs is a key advantage of close corporations, distinguishing them from other types of corporations that may experience restrictions or additional financial complexities.