Which of the following is a disadvantage associated with Subchapter S corporations?

• A. Profits are taxed twice, once at the corporate level and again at the shareholder level.
• B. S corporations can issue multiple classes of stock to attract investors.
• C. There are no restrictions on the types of shareholders allowed.
• D. Shareholders are limited in number, restricting potential for raising capital.

Answer: (D)

Verified step by step guidance

1. Understand the concept of Subchapter S corporations: These are a type of corporation that allows income, deductions, and tax credits to pass through to shareholders, avoiding double taxation.
2. Review the advantages of Subchapter S corporations: They avoid double taxation, have limited liability for shareholders, and allow profits and losses to be passed directly to shareholders.
3. Identify the disadvantages of Subchapter S corporations: One key disadvantage is the limitation on the number of shareholders, which restricts the corporation's ability to raise capital effectively.
4. Analyze the options provided in the question: Eliminate incorrect statements such as 'Profits are taxed twice' (this applies to C corporations, not S corporations), and 'S corporations can issue multiple classes of stock' (S corporations are restricted to one class of stock).
5. Conclude that the correct disadvantage is 'Shareholders are limited in number, restricting potential for raising capital,' as this aligns with the restrictions imposed on Subchapter S corporations.