Which entities are prohibited from owning S Corporations?

S Corporations have specific ownership requirements established by the Internal Revenue Service (IRS). They exist to allow small businesses to pass income directly to shareholders while avoiding double taxation. However, not all entities can be shareholders in an S Corporation.

One primary restriction is that certain entities, such as C Corporations, LLCs, and partnerships, are explicitly prohibited from being shareholders. The IRS specifies that only individuals, certain trusts, and estates may hold shares in an S Corporation. This limitation helps ensure that the S Corporation maintains its status and benefits associated with this tax classification.

By prohibiting C Corporations, LLCs, and partnerships from owning an S Corporation, the IRS aims to preserve the S Corporation's structure and its intended benefits for small businesses and individual shareholders. Therefore, the correct answer signifies a comprehensive understanding of the restrictions placed on ownership of S Corporations.