Origins of the S Corp: Subchapter S Explained
- Evin Wick
- Jun 23
- 2 min read
Updated: Jul 22
What Is an S Corporation?
An S corporation is a U.S. business entity that elects to pass corporate income, losses, deductions, and credits directly through to its shareholders, avoiding the double taxation faced by traditional C corporations and mirroring partnership-style tax treatment (IRS S Corporations overview).
Legislative Roots: The Revenue Act of 1958
In 1958, Congress enacted Subchapter S as part of the Revenue Act of 1958, creating a new option between C corporations and partnerships by combining limited-liability protection with pass-through taxation. Today, Subchapter S is codified in sections 1361–1379 of Title 26 of the U.S. Code (26 U.S.C. § 1361).
Key Amendments Over Time
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) tightened shareholder eligibility rules and loss-carry forward provisions to reinforce the small-business focus of S corporations.
Tax Reform Act of 1986 refined single-class-of-stock requirements and closed perceived loopholes in S-corp taxation (Tax Foundation overview).
Regulatory Oversight and Compliance
Beyond the Internal Revenue Service (IRS), S corporations interact with several other federal and state agencies:
Small Business Administration (SBA): Offers guidance on entity selection, financing, and compliance via its "Choose a Business Structure" guide (SBA Business Structure).
Securities and Exchange Commission (SEC): Provides investor and capital-raising resources for small businesses, including S corps (SEC Small Business Resources).
Financial Accounting Standards Board (FASB): Establishes U.S. GAAP that all corporations—including S corps—must follow for financial reporting (FASB Accounting Standards Codification).
Department of Labor (DOL): Enforces payroll-tax withholding and wage-hour rules under the Fair Labor Standards Act, ensuring S-corp employees receive proper protections (DOL Fact Sheet 13).
Why It Matters Today
Widespread Adoption: There are over four million S corporations operating in the U.S., making Subchapter S one of the most common corporate forms.
Core Benefits: Pass-through taxation, limited-liability protection, and flexible ownership within statutory limits (up to 100 U.S. persons, one class of stock).
Next Steps: For entrepreneurs ready to form an S corp, check out our guide to S corp formation for election procedures, compliance checkpoints, and growth strategies.
For additional reading, see the IRS overview of S Corporations, the statutory text in Cornell Law's LII, and the Wikipedia page on S corporations.
Evin Wick JD, LLM is a Georgetown-trained tax lawyer and co-founder of S-Works, where he channels two decades of small-business tax expertise into streamlined S-Corp, bookkeeping, and payroll solutions for solo consultants.
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