Question

When a business is operated as an S corporation, what is a disadvantage?

1) The shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder
2) The shareholder is not liable for any taxes on the S corporation's income
3) The S corporation is not required to pay any taxes on its income
4) The S corporation is not allowed to distribute its income to the shareholders

Answer 1

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay taxes on their share of the corporation's income regardless of distribution.

Step-by-step explanation:

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder. This is known as pass-through taxation. Unlike a C corporation, where the corporation pays taxes on its income and then shareholders pay taxes on dividends received, in an S corporation the income is passed through to the shareholders who pay taxes on it regardless of whether it is distributed or not.