S Corporations are referred to as pass-through business entities because the owners report the corporation’s earnings and losses on their individual tax returns.  This feature of an S corporation helps owners to avoid the double taxation issue that C Corporations face.  Despite this tax advantage, however, S Corporations have several limitations.  For instance, ownership is limited to only 100 shareholders who must be non-foreign individuals, estates or certain exempt organizations or trusts, and only one class of common stock is permitted.  While S Corporations can deduct fringe benefits, employees owning more than two percent of the stock cannot exclude the fringe benefits from their taxable income.  Also, while S Corporation’s pensions are taxed much like C corporations, five percent shareholder-employees cannot borrow from the plan.  Lastly, S Corporations must use the calendar tax year when reporting taxes.  

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