Which statement about S corporations is true?

Which statement about S corporations is true?

• A. They are taxed at corporate level and profits taxed to owners.
• B. They are owned by corporations.
• C. They are pass-through entities with no restrictions on ownership.
• D. They are pass-through entities with restrictions on ownership.

Answer: (D)

S corporations are pass-through tax entities, meaning profits and losses flow to the shareholders and are taxed on their personal returns rather than at the corporate level. At the same time, they face ownership restrictions: there can be a limit on the number of shareholders (often up to 100), and shareholders must be individuals or certain eligible estates and trusts; corporations and nonresident aliens generally cannot own shares, and there is typically only one class of stock. This combination—pass-through taxation with ownership limits—is why the statement is true. The other options fail because they suggest corporate-level taxation, or ownership by corporations, or no ownership restrictions, which do not align with how S corporations are structured.

S corporations are pass-through tax entities, meaning profits and losses flow to the shareholders and are taxed on their personal returns rather than at the corporate level. At the same time, they face ownership restrictions: there can be a limit on the number of shareholders (often up to 100), and shareholders must be individuals or certain eligible estates and trusts; corporations and nonresident aliens generally cannot own shares, and there is typically only one class of stock. This combination—pass-through taxation with ownership limits—is why the statement is true. The other options fail because they suggest corporate-level taxation, or ownership by corporations, or no ownership restrictions, which do not align with how S corporations are structured.