A construction company is considering forming an S Corporation. What is the maximum number of shareholders allowed in an S Corporation?
Correct Answer
C) 100 shareholders
S Corporations are limited to 100 shareholders maximum. This restriction is one of the qualifying requirements to maintain S Corporation status for tax purposes.
Why This Is the Correct Answer
S Corporations are indeed limited to a maximum of 100 shareholders under federal tax law. This limitation is one of the key qualifying requirements that distinguishes S Corporations from C Corporations. The 100-shareholder limit helps maintain the S Corporation's pass-through tax status and prevents it from becoming too large or complex. This restriction ensures that S Corporations remain relatively small, closely-held businesses that can benefit from pass-through taxation while avoiding double taxation.
Why the Other Options Are Wrong
Option A: 150 shareholders
75 shareholders is incorrect because it understates the actual limit. While S Corporations do have shareholder restrictions, the maximum allowed is 100, not 75.
Option D: Unlimited shareholders
Unlimited shareholders is completely incorrect for S Corporations. This describes C Corporations, which can have unlimited shareholders. The shareholder limit is one of the most important distinguishing features of S Corporations.
Memory Technique
Think 'S Corporation = Small = 100 max' or remember 'S-100' as a paired concept, since S Corporations are designed for smaller businesses.
Reference Hint
Business Law chapter or Corporate Structure section - look for S Corporation qualifying requirements and shareholder limitations
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