You’ll report their adjusted gross income, which will include W2 earnings plus business income (reported to them on a K-1, entered in schedule 1, flowing through to AGI) plus other income.
If they don’t have any business income then it’s true you wouldn’t report any. But with an S Corp they can’t really control whether business income flows through. So if they had business income it’s already in their AGI.
They might have been thinking of the asset exclusion for family businesses on FAFSA: