In the United States, an S Corporation (S Corp) benefits from pass-through taxation, meaning that the corporation itself does not pay federal income tax. Instead, the income, deductions, and credits are passed through to shareholders and reported on their personal tax returns, thus avoiding double taxation. This structure is advantageous for small business owners who wish to retain the liability protection of a corporation while benefiting from the tax efficiencies similar to those of a partnership.

At the federal level, S Corps do not pay federal income tax, with profits and losses reported directly on the shareholders' personal tax returns. However, some states do not recognize S Corp status and may tax these corporations as C Corporations.
Shareholders of an S Corp who actively participate in the business are considered employees and must receive a reasonable salary, which is subject to payroll taxes. Distributions beyond this salary are not subject to self-employment taxes, potentially resulting in tax savings.

S Corps must adhere to corporate formalities, including holding annual meetings, keeping detailed minutes, and maintaining a board of directors. To qualify as an S Corp, the business must be a domestic corporation, have only allowable shareholders (individuals, certain trusts, and estates), have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation.
Depending on the nature of the business and its location, an S Corp may need to apply for various licenses and permits at the federal, state, and local levels. Compliance with these regulations is essential for maintaining the S Corp status and avoiding penalties.