Question

Which of the following would be true if Lenny, Sarah, and Sam - as the only shareholders - set the team up as an S corporation instead of a C corporation?

a) Limited liability protection
b) Double taxation of profits
c) Unlimited number of shareholders
d) Pass-through taxation

Answer 1

If Lenny, Sarah, and Sam set the team up as an S corporation instead of a C corporation, they would have limited liability protection, pass-through taxation, an unlimited number of shareholders, and no double taxation of profits.

Step-by-step explanation:

If Lenny, Sarah, and Sam set the team up as an S corporation instead of a C corporation, the following would be true:

1. Limited liability protection: Shareholder liability would be limited to the amount they have invested in the corporation, protecting their personal assets.
2. Pass-through taxation: The S corporation would not be taxed at the corporate level. Instead, the profits and losses would pass through to the shareholders, who would report them on their personal tax returns.
3. Unlimited number of shareholders: Compared to an S corporation, a C corporation does not have a limit on the number of shareholders it can have.
4. No double taxation: Unlike a C corporation, an S corporation does not face double taxation. The profits are not taxed at the corporate level and are only taxed once when they pass through to the shareholders.