True or False: An S corporation merges characteristics of both corporations and partnerships.

An S corporation indeed merges characteristics of both corporations and partnerships, making the correct answer true.

An S corporation is a special designation that allows a company to be taxed similarly to a partnership while still enjoying the limited liability protections of a corporation. This means that income, deductions, and credits can pass through to the shareholders, similar to how they would in a partnership, allowing for avoidance of double taxation that typically affects C corporations. However, S corporations still maintain corporate formalities and structures, such as having a board of directors and holding annual meetings, which are inherent to corporations.

The incorrect answer options reflect misunderstandings of the nature of S corporations and their legal and tax implications. Thus, the statement about the characteristics of the S corporation correctly serves as an introduction to understanding this specific type of business entity.