What is a drawback of forming an S Corporation?

Forming an S Corporation does indeed have the drawback of being restricted to a maximum of 100 shareholders. This limitation can impact the ability of the company to raise capital and expand, as it cannot have more than 100 owners. This restriction is particularly significant for businesses that may be considering growth or attracting more significant investment, as fewer shareholders may limit available resources and diversity in ownership.

In addition, the shareholder composition is required to be composed of individuals, certain trusts, and estates, which adds a layer of complexity regarding ownership structure compared to other business forms that can accommodate higher numbers and different types of investors. Understanding this limitation is essential for business owners considering the S Corporation structure, particularly if they anticipate needing more than 100 shareholders for growth or funding purposes.