Contractor License Practice Exam

Can "S" Corporations retain their status regardless of the number of stockholders?

1. True

2. False

3. Only up to 50 stockholders

4. Only if they have a single stockholder

The correct answer is: False

"S" Corporations must adhere to specific regulations regarding stockholders to maintain their status. A key requirement is that they can have a maximum of 100 stockholders. This rule is in place to ensure that these corporations remain closely held entities, where the benefits of pass-through taxation can be effectively managed among a limited number of shareholders. If the number of stockholders exceeds this limit, the corporation will lose its S Corporation status and be subjected to corporate taxation under C Corporation rules. The response indicating that "S" Corporations cannot retain their status regardless of the number of stockholders is indeed accurate, as exceeding the 100-stockholder limit leads to disqualification as an S Corporation. Therefore, understanding these limitations is essential for anyone managing or considering starting an S Corporation to ensure compliance with IRS regulations.