Which of the following best describes an S-Corporation?

An S-Corporation is a special type of corporation created through an IRS tax election. The primary feature that describes an S-Corporation is that it is indeed treated as a domestic corporation for tax purposes. This means that it follows the same foundational structure as a corporation but allows for pass-through taxation, where the income is not taxed at the corporate level but instead passes through to the shareholders, who report it on their personal tax returns.

This structure has significant tax implications, allowing S-Corporations to avoid the double taxation typically associated with traditional C-Corporations, where income is taxed at both the corporate level and again on dividends paid to shareholders. Furthermore, S-Corporations are limited to a specific number of shareholders (currently 100), and they do provide liability protection to the shareholders, akin to that offered by regular corporations.

The tax treatment and liability protection aspects are what distinguish S-Corporations in the landscape of corporate entities, making the identification of option B as the best description an accurate characterization. Understanding these nuances helps clarify why it is critical for business owners to select the correct business structure based on their needs.