An S corporation is a pass-through tax election — not a separate entity type — that lets eligible corporations avoid double taxation by passing income, deductions, and credits directly to shareholders' personal tax returns.
An S corporation is not a type of entity you form at the state level — it is a federal tax election made with the IRS on Form 2553. A business first forms a C corporation (or an LLC that elects to be treated as a corporation) under state law, then applies for S status with the IRS. The result: the corporation itself pays no federal income tax on most income. Instead, profits and losses flow through to shareholders' individual tax returns, similar to how a partnership or LLC is taxed.
A standard C corporation pays corporate income tax on its profits, and if it distributes dividends to shareholders, those shareholders pay income tax on the dividends again — that is the double taxation S-corp status eliminates. With an S-corp, there is only one level of taxation: at the shareholder level. The IRS S Corporations page outlines the full eligibility rules and election process.
A key IRS rule: shareholders who actively work in the business must pay themselves a reasonable salary subject to payroll taxes (FICA). Distributions above that salary are not subject to self-employment tax — which is where the tax savings come from. The IRS scrutinizes S-corps that pay artificially low salaries to avoid payroll taxes. Consult a CPA before setting up an S-corp compensation structure.
From a lender's perspective, an S-corp is a recognized legal entity with its own EIN, tax filings (Form 1120-S), and the ability to build a separate business credit profile. Those are all positive signals in a financing review. Lenders will typically look at both the business's financials and the shareholders' personal credit and income. If your S-corp is looking for growth or working capital, apply with ClearValue Lending — one application connects you with one matched lender partner. This is not legal or tax advice; work with an attorney or CPA to decide whether S-corp election is right for your situation.