The definition of an S corporation is a legal definition for a corporation that does not pay any federal income taxes and instead passes all income, losses and deduction directly to the shareholders for tax purposes.
An example of an S corporation is a small corporation where the founders are also the shareholders.
A company that has a small number of shareholders and that files with the Internal Revenue Service (IRS) to have its profits taxed to each individual, instead of having the corporation pay income tax on the profits. The advantage is that the owners avoid double taxation of their profits, once at the corporate level and again as individuals. In order to become an S-Corporation and take the special tax election allowed under sub-chapter S of the IRS code, a company must file IRS Form 2553 and the IRS must approve the application. Companies that file as S-Corporations can have a maximum of 75 individual shareholders, although some types of trusts or estates also may qualify. Shareholders must be U.S. citizens or have residency status. Companies can have only one class of stock.