The major difference between a regular C corporation and an S corporation is that the C corporation pays taxes on its income. An S corporation generally does no pay its own income tax. It files Form 1120S and distributes K-1s to shareholders. Shareholders then report their pro rata share of income, losses, and credits on their individual tax returns. The double taxation that regular corporations face is thereby avoided with an S corporation. A corporation is allowed to elect S status only if it meets certain qualifications.

The big Advantage of S status is that it combines the limited liability of a regular corporation with tax treatment similar to that of a partnership. A disadvantage is that S corporations have some fringe benefit restrictions for employees who own more than 2% of the corporation.