What is a subchapter S corporation?

A subchapter S corporation is a specific type of corporation that has chosen to be taxed under Subchapter S of the Internal Revenue Code. This designation allows income, deductions, and credits to pass through to the shareholders, avoiding the double taxation that typically applies to traditional corporations, which are taxed at both the corporate and individual levels when profits are distributed as dividends.

By electing for subchapter S status, the corporation essentially adopts a structure similar to that of a partnership for tax purposes, which can be particularly advantageous for small businesses and their owners, as it allows them to report business income on their personal tax returns. This can lead to lower overall tax liability for the shareholders.

The other options are inaccurate descriptions of a subchapter S corporation. Such corporations are still subject to certain state taxes, operate for profit rather than as nonprofit entities, and are typically not large multinational businesses; rather, they often serve smaller businesses seeking tax benefits.