Question

George and Mark are looking to start a business named P&P Enterprises. They are looking at an S corporation. How would this type of entity provide an advantage to George and Mark?

a.An S Corporation can attract an unlimited number of shareholders.
b.An S Corporation offers multiple classes of stock.
c.An S Corporation is a flow-through entity for income tax purposes.
d.An S Corporation enables partnerships and corporations to invest as shareholders.

Answer 1

An S corporation is beneficial for George and Mark because it is a flow-through entity that avoids double taxation, allows for limited shareholder liability, and can attract investors, while having restrictions on shareholder types and stock classes.

Step-by-step explanation:

An S corporation offers several advantages for George and Mark as they start P&P Enterprises. Among the options provided, the correct statement is that an S corporation is a flow-through entity for income tax purposes, meaning the income, deductions, and credits pass through to the shareholders and are reported on their personal income tax returns. This avoids the issue of double taxation often associated with C corporations where the corporation itself pays taxes, and then shareholders also pay taxes on dividends.

Unlike sole proprietorships or general partnerships, an S corporation allows shareholders to limit their personal liability for the business debts and actions of the S corporation. Shareholders' liability is typically limited to their investment in the corporation. Additionally, while an S corporation can easily attract investors and has the ability to sell stock, it is limited to 100 shareholders and can only issue one class of stock. Furthermore, partnerships and corporations cannot be shareholders of an S corporation, which eliminates option 'd'.