S Corporation
Not a separate entity type, but a tax election available to LLCs and C-Corps. S-Corp status lets you split income between salary (subject to payroll tax) and distributions (not subject to payroll tax), which can save self-employment tax for profitable businesses.
Ownership
Maximum 100 shareholders. Shareholders must be US citizens or residents, certain trusts, or estates. Cannot be owned by C-Corps, other S-Corps, partnerships, or non-resident aliens.
Pass-Through Taxation
Yes
State Filing Required
Yes
Self-Employment Tax
Varies
Same as the underlying entity (LLC or C-Corp). S-Corp is a tax status, not a liability shield on its own.
Pass-through. The S-Corp files Form 1120-S (information return) and issues Schedule K-1s to shareholders. Profits and losses flow through to shareholders' personal returns. No entity-level federal income tax.
Self-Employment Tax
Reduced. Owner-employees must take a 'reasonable salary' subject to FICA payroll tax (15.3% split between employer and employee). Distributions above salary are not subject to payroll tax, which is the main tax benefit.
How to Form
First form an LLC or C-Corp at the state level, then file Form 2553 with the IRS to elect S-Corp status. The election must be made within 2 months and 15 days of the start of the tax year.
Ongoing Compliance
Run payroll for owner-employees (W-2 wages), file Form 1120-S annually, issue K-1s, file quarterly payroll tax returns (Form 941), maintain corporate formalities if underlying entity is a C-Corp.
- Self-employment tax savings on distributions vs salary
- Pass-through taxation (no double taxation)
- Liability protection (via underlying LLC or C-Corp)
- Clear ownership structure with stock
- Owner must take a 'reasonable salary' (IRS-enforced, can't set salary at $0)
- Payroll processing costs ($500-$1,500/year)
- More complex tax filing (Form 1120-S)
- Strict ownership restrictions (100 shareholders max, US residents only)
- Cannot have multiple classes of stock
Profitable LLCs or small corporations where the owner's net profit exceeds a 'reasonable salary.' Generally worthwhile when net profit is above $60,000-$80,000 per year. Consult a CPA to run the numbers.
- •Form 1120-S (S-Corp Return)
- •Schedule K-1 (Shareholder Share)
- •Form 2553 (Election)
- •Form 941 (Quarterly Payroll)
- •W-2 for owner-employees
See our Tax Forms reference for details on each form.