S Corporation
A federal tax election that allows a qualifying corporation or LLC to pass income, losses, and credits through to shareholders, avoiding entity-level corporate tax.
What Is an S Corporation?
An S corporation is not a separate business entity but a federal tax classification under Subchapter S of the Internal Revenue Code. A corporation or LLC that meets specific eligibility requirements can elect S corp status to avoid the double taxation that applies to traditional C corporations. Profits and losses flow directly to shareholders' personal tax returns.
Eligibility Requirements
- No more than 100 shareholders - Shareholders must be U.S. citizens, residents, or certain trusts and estates - Only one class of stock (though voting and non-voting common stock are permitted) - The entity must be a domestic corporation or eligible LLC - All shareholders must consent to the S election in writing
Tax Advantages and Limits
S corporations avoid the 21 percent federal corporate tax that applies to C corps, and shareholder distributions are not subject to self-employment tax. However, shareholder-employees must receive reasonable compensation as W-2 wages, which is subject to payroll taxes. The IRS scrutinizes low salaries paired with high distributions. S corps must file Form 1120-S annually and issue Schedule K-1 to each shareholder. Election is made on IRS Form 2553, generally within 75 days of the start of the tax year.