Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which statement about shareholder limitations in an S corporation is accurate?

1. An S corp can have unlimited shareholders

2. An S corp is only suitable for sole proprietorships

3. An S corp can have up to 100 shareholders

4. An S corp requires at least 150 shareholders

The correct answer is: An S corp can have up to 100 shareholders

The accurate statement regarding shareholder limitations in an S corporation is that an S corp can have up to 100 shareholders. This limitation is a fundamental aspect of S corporation status, which is designed to maintain a close-knit ownership structure and pass-through taxation while avoiding more complex corporate tax structures. Furthermore, the S corporation's structure allows for a maximum of 100 shareholders, which helps ensure that it remains a more manageable and controlled entity compared to a C corporation, which can have an unlimited number of shareholders. It is also important to note that all shareholders must be individuals, certain trusts, or estates, which emphasizes the intention of S corporations to cater to smaller businesses rather than large public companies. This distinction makes S corporations particularly appealing for small business owners looking for limited liability protection while benefiting from pass-through taxation, rather than for larger ventures that might require capital from numerous investors. Understanding this limitation is crucial for entrepreneurs when deciding on the most suitable business structure for their needs, particularly when weighing the benefits and drawbacks of forming an S corporation versus a C corporation or other business types.