What distinguishes S corporations from C corporations?

S corporations are distinct from C corporations primarily in their ownership structure and taxation status. One of the key characteristics of S corporations is the limitation on their number of shareholders; they are allowed to have a maximum of 100 owners, which fosters a closer-knit ownership group and is often beneficial for small to medium-sized businesses looking for pass-through taxation without the double taxation encountered by C corporations.

This limitation on ownership helps S corporations maintain simplified taxation processes—where income is passed directly to shareholders, thereby avoiding taxation at the corporate level. The 100-shareholder cap means that S corporations often appeal to smaller business entities that prioritize proximity in governance and the tax advantages provided.

In contrast, C corporations do not have this restriction. They can have an unlimited number of shareholders, which can facilitate larger business structures and allow for broader capital acquisition strategies. The incorrect options highlight misunderstandings regarding the fundamental frameworks governing these two corporate entities. While the ownership structure is critical in differentiating the two, understanding the tax implications plays a role in a business's choice of corporate form.