What characterizes an S corporation?

An S corporation is primarily characterized by its tax treatment, which allows income to be taxed on a pass-through basis to shareholders. This means that the income earned by the S corporation is not taxed at the corporate level; instead, it is passed through to the shareholders, who report it on their individual tax returns. This feature helps to avoid the double taxation that is typically associated with C corporations, where income is taxed at both the corporate level and again at the individual level when distributed as dividends.

The option that states it can have unlimited shareholders is incorrect because S corporations are limited to a maximum of 100 shareholders. The choice regarding S corporations being for non-profit organizations is also inaccurate, as S corporations are specifically for for-profit entities that meet certain requirements. Finally, stating that S corporations require dual taxation as compared to C corporations is misleading; in fact, S corporations are chosen specifically to avoid the double taxation faced by C corporations. Thus, the defining characteristic that distinguishes an S corporation is indeed its ability to allow income to be taxed on a pass-through basis.