Which of the following is a criterion for an S corporation election?

The criterion for an S corporation election that stands out is that the corporation must have only allowable shareholders. An S corporation can have a limited number of shareholders, specifically no more than 100, and these shareholders must meet certain eligibility requirements. Allowable shareholders typically include individuals who are U.S. citizens or residents, certain trusts, and estates, but they cannot include partnerships, corporations, or non-resident aliens.

The importance of this criterion lies in the very purpose of an S corporation: to provide the tax benefits of a pass-through entity while limiting the types of potential investors to those who fit the specific qualifications. This ensures that the corporation is more closely held and limits the complexity that can arise from having a broad base of investors, which is often seen in larger, more formal corporate structures.

Other options, such as having over 150 shareholders or being a foreign corporation, do not align with the requirements for S corporation status, as the latter is limited in the number of allowable shareholders and must be a domestic corporation. Furthermore, the distribution of dividends does not impact the eligibility for S corporation status; S corporations can indeed distribute dividends, although they often serve as pass-through entities for income taxation purposes.