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 Tennessee, as in other states, S corporations are recognized as pass-through entities for federal tax purposes, meaning they pass income, losses, deductions, and credits to their shareholders, who then report these on their personal tax returns. This structure avoids the double taxation typically associated with C corporations, where both the corporation and the shareholders are taxed. To be eligible for S corporation status, a corporation must be domestic, have only allowable shareholders (including individuals, certain trusts, and estates, but not partnerships, other corporations, or non-resident alien shareholders), have no more than 100 shareholders, have 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 federal government sets the requirements for S corporation status, Tennessee state tax law also recognizes the S corporation structure and taxes shareholders accordingly. It's important for corporations in Tennessee considering this status to comply with both federal and state regulations and to consult with an attorney or tax advisor to ensure proper adherence to all legal requirements.