How does the taxation of S corporation shareholders differ from that of C corporation shareholders?

S corporation shareholders benefit from a pass-through taxation structure, meaning that the profits of the corporation are reported directly on their personal tax returns. As a result, the income is taxed only at the shareholder level, which effectively helps to avoid double taxation. In contrast, C corporation profits are taxed at the corporate level first and then taxed again when distributed as dividends to shareholders.

By opting for S corporation status, shareholders therefore do not face the additional layer of taxation typically associated with C corporations. This advantage is a key reason many businesses choose to elect S corporation status—enabling their shareholders to realize more favorable tax treatment.