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S Corporations, Explained

Want to know more about S Corps, their pros and cons, how they compare to other entity types, and how to form one of your own? Here's everything you need to know.

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What Is an S Corp?

An S Corporation is a type of corporation that passes corporate income, losses, tax deductions and tax credits along to its shareholders, all without needing to pay separate corporate taxes. The formation of S Corps is also relatively small compared to larger corporations and aren't permitted to have more than 100 shareholders.

S Corp Requirements

In order to be classified as an S Corp, a corporation must meet a specific set of requirements as defined by the Internal Revenue Service (IRS).

Namely, it needs to:

  • Be a domestic corporation, i.e., one that's incorporated in and does business in the United States.
  • Limit its number of shareholders to 100 or fewer.
  • Have the correct types of shareholders — individuals, estates and some trusts are allowed, while partnerships, other corporations and non-resident aliens are not.
  • Have no more than one class of stock, such as common (Class A) stock or preferred (Class B) stock.
  • Not be an ineligible type of corporation, including an insurance company, a financial institution that uses certain methods or a current or former domestic international sales corporation (DISC).

To officially become an S Corp, a corporation needs to file an election via Form 2553. If the IRS grants its request, it will be able to enjoy the pass-through taxation benefits that all S Corps do.

S Corp Pros and Cons

Just like every other type of business structure, S Corps have their own unique set of advantages (and limitations). Use the breakdown below to help decipher if opening an S Corp is the right move for your business.

Advantages of an S Corp

For business owners looking to save money on taxes, S Corps can be nothing short of ideal. After all, no one likes paying more taxes than they need to. Curious to see how forming an S Corp could help you? If you choose to go the S Corp route, you'll receive benefits such as:

  • No double taxation

    Since S Corps are pass-through entities, they don't have to pay federal corporate tax. In this way, they can avoid double taxation, which occurs when the same money is taxed once at the corporate level and then again at an individual level.

  • Lower personal taxes for shareholders

    Because shareholders can report the income they receive from the company as a salary, they can reduce the portion of their income that's subject to self-employment tax. (Use our S Corp tax calculator to see how much money you could save by switching to an S Corp structure.)

    S Corp tax calculator
  • Asset protection

    If you file your business as an S Corp, your personal assets will be separated from your company's assets. In other words, if your S Corp ever goes bankrupt or gets into legal trouble, your house, car and other personal assets won't be at risk.

  • Easy transfer of ownership

    In many cases, a shareholder can transfer ownership of an S Corp simply by selling their shares to another shareholder.

Limitations of an S Corp

Entrepreneurs know better than anyone that nothing is perfect — from finding the right employees to raising capital to staying competitive, business ownership is a challenging endeavor.

S Corps are no different, and despite their numerous advantages also have a few limitations. These include:

  • Ownership restrictions

    S Corps can't have more than 100 shareholders, and they must all meet certain requirements. This limits the number and type of shareholders you'll be able to bring on board.

  • Stock restrictions

    Since they're not permitted to offer more than one class of stock, S Corps won't be able to reap the benefits of having different types of stocks with different levels of voting rights.

  • IRS scrutiny

    It's possible for S Corps to unfairly avoid payroll taxes by characterizing shareholder wages as corporate distributions. So, the IRS keeps a close eye on how S Corps dole out payments.

  • Compliance requirements

    Due to the strict set of rules determining which companies can and can't become S Corps, existing S Corps must take care to remain compliant with the IRS and file all the appropriate forms.

What's the Difference Between an S Corp, C Corp and LLC?

Want to assess a C Corporation vs. S Corporation or discover the difference between an S Corp vs. an LLC? Our side-by-side comparison can help.

Business Comparison Chart

Check your state's rules and regulations to see if exceptions apply to your business.

How to Form an S Corp

Ready to start filing an S Corp? Form your S Corp now with Bizee's service — just select your state, tell us about your business and we'll:

  • Prepare and file Articles of Organization with your Secretary of State
  • Provide unlimited name searches
  • Give you free Registered Agent service for one full year

Of course, you could always go to your Secretary of State's website, hunt down the required forms, fill out the forms correctly and file your Articles of Organization yourself. But as an entrepreneur, you probably have about 100 other things on your to-do list — if that's the case, our service can help.

S Corp FAQs


What Does S Corporation Stand For?

Unfortunately, the "S" in S Corp doesn't stand for "Super" or "Splendid." Instead, it's referencing Subchapter S of the Internal Revenue Code. (We still think S Corps are super and splendid, though.)


Why Would You Choose an S Corporation?

Business owners may choose to form an S Corporation for a number of reasons, but the primary one is arguably the potential for reduced taxes. If you're not sure if you could save money by forming an S Corp, find out with our S Corp tax calculator.


How Does an S Corp Work?

As pass-through entities, S Corps work by passing their income (along with their losses, deductions and credits) on to its shareholders, thus avoiding the need to pay federal corporate tax altogether.

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