What is an S Corporation?

An S Corporation is a type of corporation that passes its income, losses, deductions, and credits directly to its shareholders for federal tax purposes, which means the corporation itself generally pays no federal income tax. This pass through structure helps owners avoid double taxation, which is the problem that affects regular corporations when the company pays tax on profits and then shareholders pay tax again when those profits are distributed as dividends. The name comes from Subchapter S of the Internal Revenue Code, which is the section of the tax law that governs these entities. To qualify, a business must meet several requirements including having no more than 100 shareholders, only one class of stock, and only eligible shareholders such as U.S. citizens and certain trusts. S Corporations are popular with small and midsize businesses because they combine the legal liability protection of a corporation with the tax efficiency of a partnership.