Which of the following is NOT true about S corporations?

• A. They have limited shareholders
• B. They are taxed as partnerships
• C. They can have unlimited types of investors
• D. They provide limited liability to their shareholders

Answer: (C)

S corporations are a special type of corporation that meets specific Internal Revenue Code requirements and can elect to be taxed as pass-through entities, similar to partnerships, where income is passed directly to shareholders and taxed at their individual income tax rates.

The statement that is not true about S corporations is that they can have unlimited types of investors. In fact, S corporations have significant restrictions on the number and types of shareholders they can have. Specifically, they can have a maximum of 100 shareholders, and all shareholders must be U.S. citizens or residents, which limits the diversity of investors they can attract compared to other business structures.

In contrast, S corporations do provide limited liability to their shareholders, protecting personal assets from business debts and liabilities, and they are indeed taxed as partnerships for income tax purposes. The limitation on the number of shareholders and the requirement that they all be individuals or specific trusts are key features defining S corporations, distinguishing them from other entity types like C corporations, which can have an unlimited number of shareholders and various types of investors.