A corporation with a special IRS tax election that allows pass-through taxation, but is restricted to 100 shareholders and cannot accept VC investment.
An S-Corporation is a regular corporation that has made a special election with the IRS to be taxed as a pass-through entity, similar to an LLC. Instead of the corporation paying corporate income tax, profits and losses flow through to shareholders' personal tax returns. This avoids the double taxation of a standard C-Corp.
However, S-Corps come with significant restrictions: no more than 100 shareholders, all shareholders must be U.S. citizens or permanent residents, only one class of stock is allowed (no preferred stock), and institutional investors like VC funds cannot hold S-Corp shares. These restrictions make S-Corps impractical for startups planning to raise outside investment.
S-Corps are most useful for profitable small businesses and professional service firms (law offices, medical practices, accounting firms) where the owners want to avoid self-employment tax on distributions above a reasonable salary. If you're building a VC-backed startup, a Delaware C-Corp is almost always the right choice. If you're building a profitable small business without plans to raise institutional money, talk to a CPA about whether an S-Corp election makes sense for your tax situation.