Multiple Choice
Which of the following classifications represents the greatest number of shares of common stock for a corporation?
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12. Stockholders' Equity
Characteristics of a Corporation
Multiple Choice
Which of the following is a disadvantage of S corporations?
A
S corporations have unlimited liability for their owners.
B
S corporations cannot issue stock to raise capital.
C
S corporations are taxed twice on corporate earnings.
D
S corporations are subject to restrictions on the number and type of shareholders.
Verified step by step guidance1
Understand the concept of an S corporation: An S corporation is a type of corporation that meets specific Internal Revenue Service (IRS) requirements. It allows income, losses, deductions, and credits to pass through to shareholders for federal tax purposes, avoiding double taxation.
Review the advantages of S corporations: These include limited liability for owners, pass-through taxation (avoiding double taxation), and the ability to raise capital through stock issuance.
Identify the disadvantages of S corporations: S corporations are subject to restrictions, such as limits on the number of shareholders (typically 100) and the requirement that shareholders must generally be U.S. citizens or residents. Additionally, they cannot have certain types of shareholders, such as partnerships or corporations.
Analyze the options provided in the question: Evaluate each statement to determine whether it accurately describes a disadvantage of S corporations. For example, S corporations do not have unlimited liability (owners have limited liability), they can issue stock to raise capital, and they are not taxed twice on corporate earnings.
Conclude that the correct answer is: 'S corporations are subject to restrictions on the number and type of shareholders,' as this is a well-known limitation of S corporations under IRS regulations.
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