What is the main advantage of an S Corporation?

An S Corporation's primary advantage is avoidance of double taxation. This structure allows the corporation to pass its income, losses, deductions, and credits directly to shareholders for federal tax purposes. This means that the corporation itself does not pay federal income tax; instead, the income is reported on the personal tax returns of the shareholders, thus only being taxed once.

This is particularly beneficial for small business owners, as it helps them avoid the scenario of paying corporate taxes on profits, and then the shareholders also paying taxes on the dividends they receive. Consequently, S Corporations can help retain more earnings within the company, allowing for reinvestment and growth.

The other options present features not typically associated with S Corporations. For instance, the ability to issue multiple classes of stock is a characteristic generally associated with C Corporations, while exemptions from state taxes vary by jurisdiction and are not universally applicable. Additionally, there are specific limitations on the number of shareholders that an S Corporation can have, specifically capped at 100, which contrasts with the suggestive implication of an unlimited number of shareholders.