S Corp Facts: Shareholder Limits and Key Misconceptions

Question:

Which of the following is false, about an S Corp? The number of shareholders must be more than 100.

A) Shares are freely transferable.

B) Owners are not subject to double taxation.

C) Owners face limited liability.

D) Shareholders must not be corporations.

Answer Description

In the context of an S Corporation (S Corp), several specific characteristics distinguish it from other corporate structures. The false statement among the options provided about an S Corp is:

“The number of shareholders must be more than 100.”

Here’s why this statement is false and a brief overview of the correct features of an S Corp:

Shareholder Limit: An S Corp is restricted to having 100 or fewer shareholders, not more than 100. This is one of the key differences between an S Corp and other corporate structures like C Corporations, which do not have a limit on the number of shareholders.

Shares Transferability: Shares in an S Corp are not freely transferable. This means that S Corps has restrictions on who can own shares and how they can be transferred. For instance, shares can only be transferred to eligible shareholders, which excludes other corporations and non-resident aliens.

Taxation: An S Corp allows for pass-through taxation, meaning that income, deductions, and credits pass through the corporation to the shareholder’s tax returns. This structure avoids double taxation, which is common in C Corporations where the company’s profits are taxed at the corporate level and again at the individual level when distributed as dividends.

Limited Liability: Shareholders of an S Corp enjoy limited liability, meaning their assets are protected from the corporation’s debts and liabilities.

Shareholder Restrictions: Shareholders in an S Corp must be individuals, certain trusts, or estates. They cannot be other corporations or partnerships.

Summary

The false statement is that the number of shareholders must be more than 100. In reality, an S Corp can have a maximum of 100 shareholders. The other statements accurately describe the characteristics of an S Corp, including its limited liability, the pass-through taxation benefit, and restrictions on share transfers and shareholder types.