What is an S corporation?

• A. A corporation with limited shareholders and special tax treatment
• B. A type of non-profit organization
• C. A partnership with restricted liability
• D. A sole proprietorship with corporate benefits

Answer: (A)

An S corporation is indeed defined as a corporation that meets specific Internal Revenue Code requirements, allowing it to pass income directly to shareholders and avoid double taxation. This special tax treatment means that the S corporation does not pay federal income tax at the corporate level; instead, profits and losses are passed through to shareholders, who report them on their individual tax returns. This structure is beneficial for small business owners who want the advantages of a corporation, such as limited liability, while still enjoying the tax benefits similar to a partnership.

The other choices do not accurately represent an S corporation. Non-profit organizations are structured to operate for charitable purposes and do not distribute profits to shareholders. A partnership involves two or more individuals sharing profits and liabilities but lacks the corporate structure of an S corporation. Lastly, a sole proprietorship, while offering benefits of simplicity and operational control, does not provide the liability protections and tax advantages that an S corporation offers. Therefore, the definition of an S corporation as one with limited shareholders and special tax treatment accurately reflects its characteristics and benefits.