Companies or corporations are classified according to general categories. Such categories may be based on the mode or manner of taxation or the number of shareholders it has. An S corporation is categorized according to the Internal Revenue Code of the United States. This code provides for categorization of corporations according to the manner under which it should be taxed, in this case, under subchapter S of chapter 1. Thus, an S Corp is so named after the subchapter under which manner it should be taxed.
An S Corp is a separate legal entity that does not encroach upon the personal entity of partners or shareholders. Thus, the partners or shareholders face limited liability in terms of debt or credit made on behalf of the corporation. However, an S Corp is taxed similarly to a partnership in that it is only subject to single taxation, as compared to a C Corp that is subject to double taxation. The distributed earnings made by an S Corp are not subject to taxation as well as other corporate penalty taxes.
Unlike the C Corp, the S Corp is not subject to federal income taxation. Its income or losses are divided among shareholders who are responsible for reporting for their own income or loss on their own income tax returns. In order to become recognized as an S Corp, the corporation must meet the eligibility criteria according to the Internal Revenue Services. Qualifications include a limit of 100 shareholders, possession of only 1 class of stock, and recognition as an eligible entity.