Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

How many shareholders is an S Corporation restricted to?

1. 50

2. 75

3. 100

4. 150

The correct answer is: 100

An S Corporation is restricted to a maximum of 100 shareholders, which is stipulated by the Internal Revenue Code. This limitation is designed to maintain the S Corporation's status as a pass-through entity for tax purposes, allowing income to be taxed at the shareholder level instead of the corporate level. The requirement also helps to ensure that S Corporations remain relatively small businesses, as they are meant to be an alternative for small businesses rather than large corporations. This restriction does not include certain family members, as a provision allows members of a family to be treated as a single shareholder for the purposes of this limit, potentially providing some flexibility in ownership while still adhering to the overall cap. Understanding the significance of the 100 shareholder limit is crucial for real estate professionals advising clients on entity formation or investment structures, as exceeding this number can result in the loss of S Corporation status and its associated tax benefits.