What is the main tax advantage of an S-Corporation?

The main tax advantage of an S-Corporation lies in the ability to avoid double taxation. In a traditional C-Corporation, the company pays corporate income tax on its profits, and then shareholders are taxed again on any dividends they receive. In contrast, an S-Corporation is classified as a pass-through entity, which means that the earnings are not taxed at the corporate level. Instead, the income, deductions, and tax credits pass directly through to the individual shareholders' tax returns. This structure allows shareholders to report their share of the corporation's income on their personal tax returns, thereby paying taxes only once at their individual tax rates.

This unique tax treatment can lead to tax savings and simplification for the shareholders compared to C-Corporations, where double taxation can diminish overall profits and distribute obligations more complicatedly. It is important for shareholders and business owners to understand this key feature when considering the right structure for their business to maximize tax effectiveness.