Which of the following is a disadvantage of S corporations?

• A. S corporations are taxed twice on their income, once at the corporate level and again at the shareholder level.
• B. S corporations can issue multiple classes of stock to attract investors.
• C. S corporations are subject to strict eligibility requirements, such as limits on the number and type of shareholders.
• D. S corporations have unlimited liability for their shareholders.

Answer: (C)

Verified step by step guidance

1. Understand the concept of S corporations: S corporations are a type of corporation that allows income, losses, deductions, and credits to pass through to shareholders for federal tax purposes, avoiding double taxation.
2. Review the advantages of S corporations: They are not taxed at the corporate level, and shareholders report income on their personal tax returns, avoiding double taxation. Additionally, S corporations have limited liability for shareholders.
3. Analyze the disadvantages of S corporations: They are subject to strict eligibility requirements, such as limits on the number of shareholders (typically 100 or fewer) and restrictions on the types of shareholders (e.g., individuals, certain trusts, and estates).
4. Evaluate the incorrect options: S corporations are not taxed twice (avoiding double taxation is a key advantage), and they cannot issue multiple classes of stock; they are limited to one class of stock.
5. Conclude that the correct disadvantage is: S corporations are subject to strict eligibility requirements, such as limits on the number and type of shareholders.