What is the tax structure of an S Corporation?

An S Corporation operates under a unique tax structure that allows it to avoid being taxed at the corporate level. This means that the income, losses, deductions, and credits of the corporation pass through directly to the shareholders. As a result, the shareholders report this income on their personal tax returns, thereby facing taxation instead at the individual level. This pass-through taxation mechanism aids in avoiding the double taxation typically associated with standard corporations, where profits are taxed at both the corporate and the shareholder levels. Furthermore, S Corporations also provide limited liability protection to their shareholders, which is not related to the tax structure but is an important feature of this type of business entity.