Final answer:
An S corporation combines the organizational benefits of a corporation with the tax advantages of a partnership, being a separate legal entity while avoiding double taxation. Its shareholders have limited liability, contrasting with the unlimited liability found in partnerships.
Step-by-step explanation:
An S corporation A. has all the organizational benefits of a corporation and its income is only taxed once, which is one of its primary advantages. This structure combines the legal protections of a corporation with the tax benefits of a partnership.
Unlike traditional corporations, known as C corporations, which experience double taxation—once at the corporate level and once at the individual level on dividends—S corporations have their income, losses, deductions, and credits passed through to their shareholders' tax returns. Thus, S corporations avoid double taxation.
An S corporation is a separate legal entity like a C corporation, which means it can sue and be sued, enter into contracts, and own assets. However, an S corporation is not similar to a partnership regarding liability; its shareholders enjoy limited liability, which means they are only liable up to the amount of their investment in the corporation.