An S-Corporation operates as a standard corporation with a maximum of 100 shareholders, channeling net income or losses directly to shareholders for tax purposes, akin to sole proprietorships or partnerships. By passing all corporate income directly to shareholders, who report it on their individual tax returns, S-Corporations evade double taxation.

A qualified domestic corporation (C-Corporation) can circumvent double taxation, occurring when income is taxed at both the corporate and shareholder levels, by opting for S-Corporation status. Typically, S-Corporations are exempt from federal income tax except for specific capital gains and passive income. Shareholders of S-Corporations report their portion of the corporation’s income or loss on their tax filings.