Banking Practice Exam

S-corporations, commonly known as S-corps, are a specific type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. One of the defining features of S-corporations is the limitation on the number of shareholders. An S-corp can have no more than 100 shareholders. This restriction helps maintain the S-corp's status, as it is designed to benefit small businesses and allow for pass-through taxation—where income is reported on the shareholders' individual tax returns, thus avoiding double taxation at the corporate level.

The structure allows for a more straightforward management and tax reporting process that aligns with the needs of smaller entities. This limitation on shareholders is what distinguishes S-corps from C-corporations, which do not have such restrictions and can have an unlimited number of shareholders.

Understanding this aspect is important for anyone considering forming an S-corp, as exceeding the 100-shareholder limit would jeopardize the corporation's S status and could result in significant tax implications. This context around the limitation emphasizes the characteristics that define S-corporations in the broader landscape of corporate structures.