a. Are there limitations on the number and types of shareholders an S corporation can have? If there are such limitations, how are the limitations different from the limitations on the number of members that an LLC can have?

b. Peter is forming an S corporation. How will the following plans that Peter has for the business affect the eligibility of the business to make the S corporation election?

i. Peter lives in California, so he plans to incorporate the business in California. However, once the business is established, he intends for the business to expand its operations to several foreign countries.

ii. Peter has several investors who want to buy stock in the new corporation, but some of those investors want to be actively involved in the business and others are only investing for the expected increases in the value of their investments. Peter wants those investors who are actively involved in the business to have greater voting power than those who will not be actively involved in the business.

c. The Michael Corporation was formed by Mike six years ago as the sole shareholder and elected to be treated as an S corporation. On December 31 of the current year, The Michael Corporation distributed $40,000 cash to Mike. What are the tax consequences (amount of gain or loss and character of gain or loss) to Mike from this distribution in the following scenarios?

i. Mikes basis in his stock was $45,000 at the time of the distribution.

ii. Mikes basis in his stock was $10,000 at the time of the distribution.