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 Vermont, 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 in Vermont, a corporation must adhere to federal guidelines: it must be a domestic corporation, restrict shareholders to allowable individuals, certain trusts, and estates (excluding partnerships, corporations, and non-resident alien shareholders), limit the number of shareholders to 100, 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. Vermont does not have a separate S corporation tax form; instead, S corporations file the same tax return as C corporations but must attach federal Form 1120S, showing their S corporation status. Shareholders must report their share of the corporation's income or loss on their personal Vermont income tax returns.