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An S Corporation stands for “subchapter S corporation,” a special tax status granted by the Internal Revenue Code that allows corporations to pass their corporate income, credits, and deductions through to their shareholders. Generally speaking, S Corporations do not pay income taxes as the company's individual shareholders divide the income among each other and report it on their own personal income tax returns. An S Corporation status lets businesses avoid double taxation, which is what happens when a business is taxed at both the corporation level and business owner level, such as with a C Corporation. An S Corporation must adhere to the following limitations:

 It must be a domestic corporation, which is based and operated in the United States of America.

 It can only have “allowable” shareholders, meaning that none of the shareholders can be partnerships, other corporations, or non-U.S. citizens.

 It cannot have more than 100 shareholders in total.

 It can only have one class of stock: common.

 All of the company's shareholders must unanimously consent to an S Corporation status.

An S Corporation offers several advantages, such as:

 It is exempt from federal income tax except for certain capital gains and passive income. It allows profits to pass through to its shareholders and the income is then taxed on the shareholder's personal tax returns at each shareholder's individual tax rates.

 It allows for limited liability protection for personal assets that are separate from the assets of the business. Shareholders are not personally liable for the company's debts or liabilities, and for the most part, creditors are not able to go after the shareholders personally to recover business debts.

 It allows for flexibility in how to characterize the income for tax purposes. As a shareholder of a corporation, you can also be an employee of the business and pay yourself a salary, which is taxed at your tax rate. In addition to your salary, you can pay yourself dividends from the corporation that are generally taxed at a lower rate than the employee salary. This helps reduce self-employment tax liability, as long as you are characterizing your salary and dividend in a reasonable way.

 It allows for easy transfer of ownership without causing significant tax consequences or terminating the corporate entity.