<P> An S corporation, for United States federal income tax purposes, is a closely held corporation (or, in some cases, a limited liability company (LLC) or a partnership) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code . In general, S corporations do not pay any income taxes . Instead, the corporation's income or losses are divided among and passed through to its shareholders . The shareholders must then report the income or loss on their own individual income tax returns . </P> <P> S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes . The term "S corporation" means a "small business corporation" which has made an election under § 1362 (a) to be taxed as an S corporation . </P> <P> The S corporation rules are contained in Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379). Congress, acting on the Department of Treasury's suggestion of 1946, created this chapter in 1958 as part of a larger package of miscellaneous tax items . S status combines the legal environment of C corporations with U.S. federal income taxation similar to that of partnerships . </P> <P> As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made . Thus, income is taxed at the shareholder level and not at the corporate level . Payments to S shareholders by the corporation are distributed tax - free to the extent that the distributed earnings were previously taxed . </P>

Who can be a member of an s corp