What is the main characteristic of an S Corporation concerning shareholders?

The main characteristic of an S Corporation regarding its shareholders is that there must be fewer than 100 shareholders. This limitation is a fundamental aspect of S Corporations, as it ensures that the corporation maintains a level of closeness and simplicity in management that is desirable for small businesses.

Additionally, this restriction promotes the S Corporation's purpose, which is to provide the benefits of incorporation, such as limited liability, while avoiding the double taxation typically associated with corporations. The shareholder limit allows S Corporations to operate more like partnerships, with fewer shareholders actively involved in the management and decision-making processes.

This characteristic also comes with specific eligibility requirements regarding who can be a shareholder. For example, shareholders must generally be individuals who are U.S. citizens or residents; certain trusts and estates may also qualify, but other entities, such as C Corporations or foreign individuals, typically cannot hold shares in an S Corporation. This structure encourages smaller businesses to retain certain tax benefits and a more manageable governance model.