Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is a major challenge of forming an S Corporation?

1. Simple administrative requirements

2. Limited liability protection

3. Difficult to set up and maintain

4. No restrictions on shareholder numbers

The correct answer is: Difficult to set up and maintain

A major challenge of forming an S Corporation is its complexity in terms of both setup and ongoing maintenance. While they offer significant benefits like pass-through taxation and limited liability, the process to establish and adhere to the regulations governing S Corporations can be cumbersome. This includes meeting specific IRS criteria, such as qualifying as a domestic corporation, having only allowable shareholders, and adhering to strict operational procedures. Additionally, S Corporations face restrictions in terms of the types of shareholders and the number of shareholders, which can introduce further complexities in managing ownership and investment. Compared to other business structures, the requirements can be more demanding, requiring careful attention to compliance and tax obligations. Understanding these nuances is crucial for effective management and avoiding potential penalties or loss of S Corporation status. Therefore, the ongoing administrative demands, including filing obligations, record-keeping, and adherence to regulatory standards, make setting up and maintaining an S Corporation more challenging.