S-Corporation S-Corp

An **S-Corporation** is not a separate entity type but a federal tax election available to eligible US corporations and LLCs. By filing IRS Form 2553, a qualifying entity passes its income, losses, deductions, and credits through to shareholders, who report them on their personal returns. The corporation itself generally pays no federal income tax.\n\nEligibility is strict: the entity must be domestic, have only allowable shareholders (US individuals, certain trusts, and estates, but not partnerships, corporations, or non-resident aliens), have no more than 100 shareholders, and have only one class of stock. Differences in voting rights are permitted but differences in distribution or liquidation rights are not.\n\nGovernance follows ordinary state corporation law: directors, officers, bylaws, and minutes. The big draw is self-employment tax savings: a working shareholder is paid a reasonable W-2 salary, and remaining profits are distributed as dividends not subject to FICA. This advantage is closely watched by the IRS, and underpaying salary to inflate distributions invites reclassification.

You will encounter the S-corp when a profitable single-owner consulting, agency, or trades business outgrows sole-proprietorship taxation and wants to reduce self-employment tax. Many CPAs recommend S-corp election once net profits reach roughly 40,000 to 60,000 USD a year. S-corps are unsuitable for venture capital, foreign owners, or multiple share classes, so growth-stage startups must revoke the election before raising priced rounds.