What is one key distinction of an S corporation compared to a C corporation?

An S corporation is distinct in its tax treatment compared to a C corporation, as it is taxed as a pass-through entity, similar to a partnership. This means that the income of the S corporation is not subject to federal corporate income tax. Instead, it passes through to the shareholders, who report the income on their personal tax returns. As a result, S corporations avoid the double taxation that C corporations face, where corporate profits are taxed at the corporate level and again at the individual level when dividends are distributed to shareholders. This pass-through taxation structure is a key feature that sets S corporations apart from C corporations, making the statement accurate and significant in understanding the business structure and tax implications.

While shareholders of an S corporation do enjoy liability protection, this is not a distinguishing feature since it is also applicable to C corporations. The maximum number of shareholders in an S corporation is limited to 100, contrary to the statement regarding unlimited shareholders. Additionally, C corporations do pay taxes on their profits, which further highlights the unique tax advantages of S corporations.