What defines an S corporation?

An S corporation is defined as a type of corporation that is taxed similarly to a partnership, which aligns with the characteristics outlined in option B. This means that instead of being taxed at the corporate level, an S corporation allows income, losses, deductions, and credits to pass through to its shareholders for federal tax purposes. This pass-through taxation helps avoid the double taxation typically associated with traditional C corporations, where both the corporation and its shareholders are taxed on profits.

The structure of an S corporation is designed to provide the liability protection of a corporation while allowing the tax benefits of a partnership. To qualify for S corporation status, specific criteria must be met, including the limitation on the number of shareholders, which is typically capped at 100, and the requirement that all shareholders must be individuals, certain trusts, or estates.

This understanding clarifies why the other options are not correct. An S corporation does not have unlimited liability (A), as it provides limited liability protection to its shareholders. It also has strict requirements regarding ownership restrictions (C), making it ineligible for unrestricted ownership, and it cannot have more than 100 shareholders (D), which is a fundamental requirement for S corporation classification.