When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

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Quizplus · Accepted Answer

This is true. S corporations are pass-through entities, meaning their income is reported on the individual tax returns of their shareholders. Shareholders must pay taxes on their share of the S corporation's income, even if the income is not actually distributed to them. This is often referred to as "phantom income."

When a Business Is Operated as an S Corporation, a Disadvantage