S-Corporation
What does "S-Corporation" mean in law?
An S-corporation is a corporation that has elected special tax status under Subchapter S of the Internal Revenue Code, allowing it to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes, thereby avoiding the double taxation that applies to regular C-corporations. To qualify, the corporation must have no more than 100 shareholders, have only one class of stock, and have only eligible shareholders (generally U.S. citizens and residents, certain trusts, and estates—not partnerships or corporations). From a state corporate law perspective, an S-corporation is governed by the same rules as any other corporation, including fiduciary duties, shareholder voting rights, and the business judgment rule. The S-election is purely a federal tax classification and does not alter the legal structure or governance obligations of the corporation under state law.
Definition
An S-corporation is a corporation that has elected special tax status under Subchapter S of the Internal Revenue Code, allowing it to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes, thereby avoiding the double taxation that applies to regular C-corporations. To qualify, the corporation must have no more than 100 shareholders, have only one class of stock, and have only eligible shareholders (generally U.S. citizens and residents, certain trusts, and estates—not partnerships or corporations). From a state corporate law perspective, an S-corporation is governed by the same rules as any other corporation, including fiduciary duties, shareholder voting rights, and the business judgment rule. The S-election is purely a federal tax classification and does not alter the legal structure or governance obligations of the corporation under state law.
Example
A family-owned consulting firm with 15 shareholders elected S-corporation status to pass through $2 million in annual profits directly to the shareholders' individual tax returns, avoiding the double taxation that would have applied had the company remained a C-corporation.