What is the distinguishing feature of an S Corporation compared to a C Corporation?

An S Corporation is primarily distinguished from a C Corporation by its taxation structure. The key feature of an S Corporation is that it allows for pass-through taxation. This means that the corporation itself does not pay federal income taxes at the corporate level; instead, the income, deductions, and credits are passed through to the shareholders, who report them on their personal tax returns. This often results in a lower effective tax rate for the shareholders, as earnings are only taxed at the individual level rather than facing double taxation—first at the corporate level and then again at the shareholder level upon distribution of dividends, which is typical for C Corporations.

The other options do not highlight the core difference: S Corporations have specific eligibility requirements that restrict ownership (unlike the broader ownership in C Corporations), and while both types provide limited liability protection to their owners, this feature is not unique to S Corporations as it applies to C Corporations as well. Lastly, the concept of higher taxes does not apply as a distinguishing feature, especially since S Corporations typically aim to minimize overall tax exposure relative to C Corporations.