A company entity that chooses to be treated as a pass-through firm, or one that pays no corporate income tax on its profits, is a S corporation. Instead, the S corporation’s gains and losses are transferred to its owners, who then report them on their individual income tax returns. By doing this, the issue of double taxation that C businesses face is avoided. C corporations are subject to corporate income tax on earnings and personal income tax on dividends.

A company must fulfill certain criteria in order to be considered a S corporation, including having no more than 100 shareholders, only one class of stock, and only eligible shareholders, such as people, certain trusts, and estates. In order to choose its tax status, a S company must additionally submit a unique form to the IRS.

A few benefits of a S company include:

• It provides its shareholders with limited liability protection so they are not held personally liable for the debts or obligations of the company.
• It enables the shareholders to take advantage of the corporate losses, credits, and deductions on their individual tax returns.
• It avoids the issue of double taxation that C companies face, which may lead to a smaller tax liability for the shareholders.