Which type of corporation provides limited liability to its shareholders but also allows income to be taxed at the individual partner level?

The choice of an S corporation is the correct answer because it uniquely combines the benefits of limited liability protection for its shareholders and the tax treatment of a partnership. In an S corporation, shareholders enjoy limited personal liability for the corporation's debts and obligations, similar to a C corporation. However, the key distinguishing factor is how income is taxed.

With an S corporation, income is passed through to the shareholders and reported on their individual tax returns, thereby avoiding the double taxation typically associated with C corporations, where the corporation pays taxes on its profits and shareholders also pay taxes on dividends they receive. This pass-through taxation feature allows for taxation at the individual level, similar to partnerships.

This structure is appealing for small businesses, as it allows them to retain the liability protection offered by a corporation while avoiding the more cumbersome tax structure associated with a C corporation.

Other entity types like C corporations impose corporate taxes, while general corporations do not offer distinct tax treatments, and limited liability corporations (LLCs) have different operational and taxation characteristics that do not match the profile specified in the question.