What is an "S corporation"?

An "S corporation" refers specifically to a type of corporation that has elected to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This structure allows shareholders to report the income and losses on their personal tax returns, thereby avoiding the double taxation that typically affects traditional C corporations, which are taxed at both the corporate level and again at the individual level when profits are distributed as dividends.

This pass-through taxation feature is crucial for many small businesses because it can lead to significant tax savings. Shareholders of S corporations are also able to take advantage of certain tax benefits while maintaining the liability protection that a corporation affords.

The other options present incorrect definitions. While S corporations can have a limited number of shareholders — up to 100 individuals, specifically — they are not limited to just one shareholder. Similarly, an S corporation is not a designation for nonprofits, which typically do not pay corporate income tax because they are organized for charitable purposes. An S corporation also does not pay corporate tax on all its income, as this would refer to a traditional C corporation's tax liability.