Businesses are generally formed under state law as:

For tax purposes, a business entity is treated as one of the following:

All US corporations, other than S-corporations, are C-corporations. C-corporations are generally subject to two levels of US federal income tax on their income:

The relative inefficiency of two levels of taxation is somewhat reduced by the 21% corporate income tax rate that took effect beginning in 2018. However, an eligible C-corporation generally can avoid this double taxation by electing on formation to be treated as an S-corporation if it meets the Internal Revenue Code (IRC) requirements for an S-corporation election.

Because an S-corporation is treated as a pass-through entity for tax purposes, it generally does not pay an entity level tax. Instead, the S-corporation's profits and losses generally pass through to its shareholders who include their respective share of those items on their US federal income tax returns (whether or not distributed).

However, there are substantial limitations on the availability of the S-corporation election. For example, an S-corporation can have:

(IRC § 1361.)

In addition, only an eligible US entity can make the election (generally a US C-corporation or other US business entity eligible to elect C-corporation tax status) (IRC § 1361 and Treas. Reg. § 1.1361-1(c)). To qualify for the election, an eligible US entity generally must make a timely S-corporation election on IRS Form 2553, no more than two months and 15 days after the beginning of the tax year the election is to take effect (IRC § 1362).

Maintaining S-corporation status after formation calls for careful attention to:

An S-corporation election terminates if the electing company fails to satisfy the requirements for an S-corporation (for example, the company issues a second class of stock or sells stock to an ineligible shareholder). If the S-election terminates, the company converts to a C-corporation and generally cannot make an S-election for five years (IRC § 1362(g)).

Acquiring an S-corporation can raise more issues and be more complicated than an acquisition of a C-corporation even though the transactional tax rules applicable to S-corporations are generally the same as those that apply to C-corporations. The tax issues and tax treatment of an acquisition are often different for an S-corporation and its shareholders. For example, a sale of stock may terminate the target company's S-election.

The S-Corporation Toolkit provides a number of continuously maintained resources to help counsel manage the formation, maintenance and acquisition of an S-corporation.