Election by a Small Business Corporation

A small business can avoid double taxation by becoming an "S corporation."

An S corporation does not pay federal income tax, except on some capital gains and passive income. Shareholders report their share of the corporation's income on their tax returns.

To become an S corporation, you must file an Election of Small Business Corporation form with the Internal Revenue Service (IRS). Both the S corporation and its shareholders need to include special forms when filing their income and employment taxes.