A Michigan contractor forms an S-Corporation. What is the maximum number of shareholders allowed?
Correct Answer
A) 100
An S-Corporation is limited to 100 shareholders under federal tax law, which applies in Michigan.
Why This Is the Correct Answer
Under federal tax law (IRC Section 1361), S-Corporations are limited to a maximum of 100 shareholders. This federal limitation applies uniformly across all states, including Michigan. The 100-shareholder limit is one of the key eligibility requirements that distinguishes S-Corporations from C-Corporations, which have no shareholder limits. Michigan contractors forming S-Corporations must comply with this federal restriction regardless of state incorporation laws.
Why the Other Options Are Wrong
Option B: 50
S-Corporations cannot have unlimited shareholders. This restriction distinguishes them from C-Corporations, which have no shareholder limits. The 100-shareholder cap is a fundamental requirement for maintaining S-Corporation tax status under federal law.
Option D: Unlimited
50 shareholders was the previous federal limit for S-Corporations before tax law changes increased it to 100. This outdated limit no longer applies and would incorrectly restrict the business structure options available to Michigan contractors.
Memory Technique
Remember 'S-Corp = 100 Stop' - S-Corporations must stop at 100 shareholders to maintain their special tax status.
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