S corporations (also known as Subchapter S corporations) are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
Be a domestic corporation
• Have only allowable shareholders
o may be individuals, certain trusts, and estates, and
o may not be partnerships, corporations, or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).

In Hawaii, as in other states, S corporations are recognized as pass-through entities for federal tax purposes, meaning that income, losses, deductions, and credits are passed through to shareholders instead of being taxed at the corporate level. This structure avoids the double taxation that can occur with C corporations, where both the corporation's profits and the shareholders' dividends are taxed. To qualify as an S corporation, a business must be a domestic corporation with allowable shareholders that include individuals, certain trusts, and estates, but not partnerships, other corporations, or non-resident alien shareholders. It must also have no more than 100 shareholders, only one class of stock, and not fall into the category of ineligible corporations, such as certain financial institutions, insurance companies, and domestic international sales corporations. While the S corporation status affects federal tax obligations, Hawaii recognizes the S corporation status for state tax purposes as well, and the state tax treatment generally mirrors the federal treatment. Shareholders in Hawaii must report their share of the corporation's income on their personal state tax returns and are taxed at their individual state income tax rates.