What defines an S Corporation?

An S Corporation is defined primarily by its tax structure, which allows it to avoid double taxation on income. In a standard corporation, also known as a C Corporation, income is taxed at the corporate level, and then again at the individual level when dividends are distributed to shareholders. However, an S Corporation, by electing this status with the IRS, has its income passed directly to shareholders without being subject to federal income tax at the corporate level. This means that the profits are reported on the shareholders' personal tax returns, effectively only taxed once, which is a key advantage of this structure.

The other options describe different aspects related to corporate structures but do not accurately define the S Corporation’s primary characteristic. For instance, while lower tax rates may be a benefit for certain businesses, it does not specifically define an S Corporation. A sole proprietorship and a limited liability company (LLC) represent different business structures altogether and are not synonymous with an S Corporation. The S Corporation status is unique in its approach to taxation and is not simply an enhancement of these other business structures.