An S Corporation is a corporation in which the owners have chosen a “pass through” tax structure. That is to say that in an S-Corp is a corporation’s profits and losses are “passed through” to the owners and the corporation does not stand alone as a separate tax entity. The tax impacts are similar to a sole proprietorship.
The name “S-Corp.” comes from the fact that the corporate owners have chosen to have the corporation taxed under IRS sub-chapter “S” rules (pass through) rather than the traditional IRS sub-chapter “C” tax rules (referred to as a C-Corp.).
A C-corporation is taxed as a separate entity from the owners, files and pays it’s own, separate income taxes based upon its annual profit or loss. A “C-Corp” will traditionally pay the owners a salary, where as an S-Corp will attribute all profits or losses directly to the owners who will pay those taxes as individuals.