S Corporation

S-Corporation (S-Corp)

What It Is

An S-Corporation (S-Corp) is a special type of corporation that blends the benefits of a traditional corporation with some tax perks usually seen in partnerships or LLCs. Structurally, it’s just like a C-Corp: you have shareholders, a board of directors, bylaws, and state filing requirements.

The difference is purely tax-related — the IRS treats the company as a “pass-through entity.” This means the S-Corporation itself doesn’t pay federal income tax. Instead, profits (and losses) “pass through” to shareholders, who report them on their personal tax returns.

Pros

• Taxation: Only shareholders are taxed — the corporation itself isn’t taxed on profits at the federal level.
• Limited Liability Protection: Just like a C-Corp, owners’ personal assets are protected from business debts and lawsuits.
• Tax Savings on Self-Employment Taxes: Owners can be employees and pay themselves a “reasonable salary.” Profits above that salary can be taken as dividends, taxed at a lower rate.
• Transferability of Shares: Easier to transfer ownership compared to an LLC, with fewer complications.
• Increased Credibility: Being incorporated can make your business appear more established to lenders, vendors, and customers.

Cons

• Eligibility Restrictions: Limited to 100 shareholders. Shareholders must be U.S. citizens or residents. Certain entities like corporations or partnerships cannot be shareholders.
• Strict IRS Rules: Only one class of stock is allowed. Missing IRS deadlines or violating rules can revoke S-Corp status.
• Ongoing Compliance: Must maintain bylaws, hold annual meetings, keep minutes, and file annual reports — just like a C-Corp.
• IRS Scrutiny on Salaries: The IRS carefully checks that owner-employees pay themselves a fair wage, not just dividends.
• State Taxes May Still Apply: Some states (like California) impose their own corporate-level taxes or franchise fees on S-Corps.

Bottom Line

An S-Corp is best for small-to-medium businesses that want the protection of a corporation. It’s especially appealing for business owners looking to reduce self-employment taxes while staying relatively lean and private.