What are the disadvantages of electing S corporation status?

S Corporation status was first conceived as a benefit for "small" businesses. The eligibility rules were initially very restrictive. While these rules have evolved over time, they still exist, and can limit the flexibility of an S Corporation in structuring the business relationship among its shareholders. These limitations include:

1. The permitted number of shareholders is limited to 100 (originally 10).
2. Certain persons/entities cannot be shareholders (non-resident aliens, corporations, partnerships).
3. There can be only one class of stock or ownership interest, although voting and non-voting stock is permitted.
4. All distributions to shareholder/owners must be made strictly on the basis of their percentage ownership in the S Corporation. In other words, unlike limited liability companies taxed as a partnership, there can be no provisions granting preferential distribution rights to one shareholder/owner over other shareholder/owners.