Final answer:
S Corps are somewhat limited in their capital raising ability due to restrictions on the number and type of shareholders and the issuance of only one class of stock, affecting their potential investment pool.
Step-by-step explanation:
Are S Corps limited on capital raising ability? S Corporations do face certain limitations regarding the raising of capital. Primarily, S Corps are restricted in terms of ownership, allowing only up to 100 shareholders, and shareholders must be individuals, certain trusts, or estates rather than business entities. This inherently limits the pool of potential investors. Furthermore, S Corps can only issue one class of stock, which may affect the attraction of investors looking for preferential rights that come with multiple stock classifications. In comparison to sole proprietorships and general partnerships, S Corps can raise more capital due to greater assets being contributed and being subject to less government regulation than C Corporations.
The sale of stock is an option to finance company growth. However, early-stage companies often rely on personal savings, private investors like angel investors and venture capital firms, as these entities often have better knowledge about whether a small firm is likely to earn profits. Corporations, in general, allow shareholders to invest without being legally liable beyond their investment should the company go bankrupt, making it easier to attract investment. This structure also makes it more conceivable for businesses to accrue funds compared to sole proprietorships.