The money passes through to the shareholders.© kv_san/stock.adobe.com; Photo illustration Encyclopædia Britannica, IncA corporation is a legal form of business organization, chartered by a state, that exists as a separate entity from its owners. A corporation with S corp status is not a separate type of legal business entity—it is a special tax status available to certain U.S. corporations under subchapter S of the Internal Revenue Code. An S corporation retains the liability protection and formal structure of a standard C corporation but is taxed more like a partnership or limited liability company (LLC), with profits and losses passing through to shareholders’ personal tax returns.

　　Eligibility and formation of an S corpTo elect S corp status, a business must first be incorporated under state law as a regular corporation. It then files IRS Form 2553, signed by all shareholders, to be taxed under subchapter S. Not all corporations qualify—S corps must:

　　Be a domestic (U.S.) corporationHave no more than 100 shareholdersHave only allowable shareholders (individuals, certain trusts, and estates—not partnerships or corporations)Issue only one class of stockAvoid certain restricted industries, such as specific financial institutions and insurance companiesTax treatmentAn S corp generally pays no federal income tax at the corporate level. Instead, each shareholder reports their share of the company’s income, deductions, and credits on their individual return using Schedule E and a Schedule K-1. Shareholders must pay personal tax on distributed and undistributed income alike.

　　Some states do not recognize the S corp election for state tax purposes and instead tax these entities as C corporations.

　　Nancy Ashburn