Which statement describes an S Corporation?

• A. Sub S Corp.
• B. Specific IRS guidelines taxed in the manner of a partnership.
• C. Profits/losses flow to shareholders.
• D. It is a nonprofit organization.

Answer: (C)

An S corporation is taxed as a pass-through entity, so profits and losses are allocated to and reported by the shareholders on their personal tax returns. This means the company itself typically isn’t taxed at the corporate level, and the income flows through to the owners to be taxed at their individual rates. That direct flow of profits and losses to the shareholders is the defining characteristic, which is why the statement about profits and losses flowing to shareholders is the best description.

The other options aren’t as precise. The term Sub S Corp isn’t standard terminology for describing an S corporation. While S corporations are taxed similarly to partnerships in that income passes through to owners, the clearest description is that profits and losses flow to shareholders. And a nonprofit organization is not correct, since S corporations are for-profit entities.