Subchapter S of the Internal Revenue Code

Subchapter S of the Internal Revenue Code governs S corporations, which are businesses that elect to pass their income, losses, deductions, and credits directly to shareholders for tax purposes. This structure allows the business itself to avoid paying federal income tax at the corporate level, preventing double taxation. Instead, shareholders report their share of the income on their personal tax returns. To qualify, an S corporation must meet specific requirements, such as having a limited number of shareholders and only one class of stock. This setup combines the benefits of incorporation with pass-through taxation, facilitating easier tax handling for small and medium-sized businesses.