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Correct Answer: 100
the maximum number of shareholders that an s-corporation can have is 100. this limit is set to ensure that the business retains its closely-held nature, which is a characteristic of s-corporations. this shareholder count includes individuals, certain trusts, and estates, but excludes partnerships and corporations as shareholders. the rule helps maintain the entity's eligibility for s-corp status, which offers tax advantages like pass-through taxation, where the income, losses, deductions, and credits flow through to the shareholders' personal tax returns, thereby avoiding double taxation.
the restriction on the number of shareholders is part of the requirements laid down by the internal revenue service (irs) under the united states tax laws. these laws stipulate various conditions an entity must meet to qualify as an s-corporation. besides the limitation on the number of shareholders, other criteria include being a domestic corporation, having only allowable shareholders (which include individuals, certain trusts, and estates but not partnerships, corporations, or non-resident alien shareholders), having only one class of stock, and not being an ineligible corporation (like certain financial institutions, insurance companies, and domestic international sales corporations).
the 100-shareholder limit was set under the american jobs creation act of 2004, an increase from the previous limit of 75 shareholders. this change was made to allow small businesses more flexibility in raising capital and expanding their shareholder base without losing the tax benefits associated with being an s-corporation. additionally, family members can elect to be treated as a single shareholder, further facilitating the accommodation of family-owned businesses within the s-corporation framework.
maintaining the status of an s-corporation and adhering to the 100-shareholder limit requires careful planning, especially in businesses where the number of shareholders may approach the maximum. companies must monitor their shareholder count and ensure compliance with all relevant irs regulations to continue enjoying the benefits of the s-corporation designation. this involves regular reviews of the shareholder structure, especially when issuing new stock or undergoing ownership changes.
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