What is a defining characteristic of an S-Corporation?

• A. It preserves the limited liability of a C-Corporation but is a pass-through entity for tax purposes
• B. It is taxed only at the corporate level
• C. It cannot have shareholders
• D. It has no board of directors

Answer: (A)

A defining characteristic is that an S-Corporation maintains the liability protection of a corporation while being treated as a pass-through entity for tax purposes. This means the business itself isn’t taxed on its profits at the corporate level; instead, the income, deductions, and credits pass through to the shareholders and are reported on their personal tax returns. You still get the limited liability protection for owners, just like a C-Corporation, but you avoid double taxation on the corporate profits at the federal level.

That combination is what sets an S-Corporation apart. It isn’t taxed solely at the corporate level (that would describe a C-Corporation), and it can have shareholders and a board of directors (so the other statements are also not accurate for an S-Corp). There are eligibility rules to maintain S-Corp status, such as limits on the number and type of shareholders and only one class of stock.