S corporations generally pay no tax, and income and losses are passed through to shareholders. The permissible number of shareholders is 100 shareholders, and eligible members of the same family may be treated as a single shareholder. Estates, certain trusts, and tax-exempt organizations may also be shareholders.

S corporations avoid the double taxation inherent in C corporations, but they must follow strict rules. S corporations that were previously C corporations can trigger corporate-level tax in certain situations.

For tax years 2009 and 2010, the American Recovery and Reinvestment Act of 2009 (ARRA) shortens, from ten to seven years, the amount of time that an S corporation that has converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion.

S corporations may own any percentage of the stock of other corporations. Fully owned subsidiaries may also elect "S" status, but the qualified subsidiary is a disregarded entity for tax purposes.