“S-Corporation” or “S-Corp” is a Corporation where the Stockholders have elected to file a Form 2553 (Election by a Small Business Corporation) with the IRS in order to be taxed as a Pass-Through Entity. Where a C-Corporation is subject to Double Taxation, the Stockholders of an S-Corporation are taxed pro rata on the profits/losses of the S-Corporation.
There are various requirements in order to be classified as an S-Corporation, including, among others: the Stockholders must be individuals (with limited exceptions for certain types of trusts); the Stockholders must be U.S. citizens or residents; there can only be one class of Stock (e.g., Common Stock); and there cannot be more than 100 Stockholders. Therefore, the S-Corp election will not hold up for many Financings, including those involving entities (such as Venture Capitalists) or foreign Investors, or where Preferred Stock is issued.
Note: Only C-Corporations (and not S-Corporations) are eligible to take advantage of the potential tax benefits of Qualified Small Business Stock.