Question

Which of the following statements about S corporations is most accurate?

Select one:
a. The major attraction of S corporations is that they avoid the problem of double taxation.
b. S Corporations are similar to C corporations, except that the majority of owners are foreign investors.
c. Any corporation willing to pay the necessary fees and fill out the required paperwork can become an S Corporation.
d. Only large corporations with operations in more than one state can qualify to be classified as S corporations.

Answer 1

The most accurate statement about S corporations is that they are attractive because they avoid double taxation, allowing income to be taxed only at the shareholder level. Therefore, correct option is a.

Step-by-step explanation:

The most accurate statement about S corporations is that a. The major attraction of S corporations is that they avoid the problem of double taxation. S corporations combine the benefits of incorporation with the tax-efficient structure of a pass-through entity, where income and losses are passed through to the shareholders and taxed at their individual tax rates, preventing the corporation itself from being taxed on the income.

This structure contrasts with C corporations, where both the corporation's profits and the dividends paid to shareholders are taxed, leading to double taxation.

Regarding other options, S corporations must have domestic owners; thus, the statement that they are characterized by foreign ownership is incorrect.

Similarly, there are specific eligibility criteria that a corporation must meet to qualify as an S corporation, making the assumption that any corporation can become an S corporation as long as they pay fees and complete paperwork, inaccurate.

Lastly, S corporations are not limited to large, multistate operations; smaller businesses can also elect this status if they comply with the requirements.