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What is an S Corporation (Subchapter S)?

The S corporation (S corp) is an IRS tax classification that can be elected by LLCs and corporations. Electing S corp status can offer tax benefits.

Small businesses can elect the S corp tax status (Subchapter S) by filing Form 2553 with the Internal Revenue Service (IRS).

In this guide, we will explain S corp advantages and disadvantages, how and when to elect an S corp tax status for your small business, S corp requirements, what is a reasonable salary, the differemt business structures, provide examples for tax benefits, and calculate shareholder distributions.

Recommended: If you have an existing LLC and need to know whether S corp tax status is right for your business, read our LLC vs S Corp guide.

Best Service to Form an S Corporation:

We recommend Collective to form your S Corp.

Collective offers an all-in-one service (S corp formation, monthly accounting, insight into tax savings, business licensing and compliance). Connect with to learn more.


S Corporations

An S corporation (S corp) is a tax classification under Subchapter S of the IRS (Internal Revenue Service) for federal, state, and local tax purposes, but it is not a business structure. Many LLCs and corporations, which are formal business structures, elect an S corp classification for its tax advantages. A riversweeps online casino app android corporation and LLC must elect S-corp status within two months and 15 days of the date of formation for the tax benefits the election provides to take effect in the first tax year. An S corp is formalized by filing Election by a Small Business Corporation from the IRS.

LLCs and corporations offer liability protection since they are formal business structures, meaning they are separate entities from their members (owners). Since an S corp is a tax status that a business elects, it has liability protection as well. 

See to learn more.

S Corp Tax Advantages

S corps are not taxed at the business level so there is no double taxation as in a C corporation. Instead, S corp business owners benefit from pass-through taxation where income, profits, credits, and losses are taxed at an individual level on the shareholder’s personal income tax return.

Here’s how taxes work in an S corp:

  • A member’s (owner’s) salary pays 
    • Self-employment taxes
    • Income tax
  • The remaining earnings or net profits, called distributions, only pay
    • Income tax

By only paying income tax on distributions, an S corp saves the business owner(s) money under the right circumstances.

S Corp Disadvantages

An S corporation can come with some initial and ongoing expenses. First, you must formalize your business if you have a sole proprietorship or a partnership by starting an LLC or a corporation. To do so, you'll have to file the Articles of Organization (LLC) or Articles of Incorporation (corporation) at the state level. Second, you’ll have to appoint a registered agent (also known as a resident agent and an agent for service of process), obtain an EIN, and pay the appropriate state fees. Some states will have additional fees, such as an annual report and/or franchise tax.

Once you start or convert your S corp, you’ll have to carefully review your S corp financial statements, since they will be subject to closer IRS scrutiny. You’ll also have additional fees depending on the state where you established your business.

Although these are a few extra factors to consider when starting an S corp, there's no need to worry. Since S corp business owners can become salaried employees and save on taxes, the additional fees can be paid with the tax savings and you can hire a service to handle your or if you choose to start a corporation.

When Should A Business Elect S Corp Status?

A small business could save on taxes by electing the S corp tax status if the following criteria is met:

  • The business meets S corp requirements and restrictions
  • The business earns enough in net profit to pay a "reasonable salary" and at least $10,000 in distributions annually
  • The addition of payroll and accounting costs doesn't outweigh tax advantages

diagram showing the requirements of an s corp

S Corp Requirements and Restrictions

The IRS requires that businesses that elect the S corp status:

  • Have 100 shareholders or less
  • Issue only one class of stock
  • Have owners that are US citizens or permanent resident aliens
  • Are owned by private individuals and not business entities such as LLCs, corporations, or trusts

Net Profit, Reasonable Salary, and Distributions

To benefit from electing S corp tax status, a business must have enough profit left over (net profit) after running and growing the business to pay the owner(s):

  • a reasonable salary
  • at least $10,000 in distributions.

After electing an S corp tax status, business owners are treated as employees for tax purposes. The IRS requires owner-employees to be paid a "reasonable salary."

A reasonable salary is any salary that you would pay someone to do the same job. Websites like or the are a good place to start researching.

Businesses taxed as S corps are subject to increased scrutiny by the IRS. It is important that your duties and salary match.

In addition to a reasonable salary, we estimate that distributions need to be at least $10,000 annually to create tax savings for business owners.

S Corp Savings Calculator

Calculate how much you can save by choosing an S Corp tax classification

Payroll and Accounting Costs

Maintaining accounting and payroll for an S corporation is best left to a professional. Payroll and accounting for a small business electing S corp is a yearly expense that must be weighed against tax savings.

Looking for the right business structure?

Visit our How to Choose a Business Structure guide for help.

Choosing a Business Structure

How to Start an S Corp

There are two main ways to start an S corp:

  • By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
  • By forming a corporation and electing S corp status from the IRS

We recommend not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.

Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.

Steps to Forming an LLC and Electing S Corp Status

Starting an LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like  to do it for you.

Six Basic Steps to Start an LLC and Elect S Corp Status:


Step 1:
Select a State

Step 2: Name Your LLC

Step 3: Choose a Registered Agent

Step 4: File the Articles of Organization

Step 5: Create an Operating Agreement

Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Select Your State


Step 2: Name Your LLC

You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.

Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.

Step 3: Choose an LLC Registered Agent

Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 6: Get an EIN and Complete Form 2553 on the IRS Website

An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business. 

EINs are free when you .

Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.

You will elect S corp on the IRS website as shown here:

a screenshot of IRS website to choose 2553

The Truic Flame Logo

We recommend using  to form an S corporation for you.

Steps for After You Start an S Corp

Once you formalize your S corp, consider adding a business phone line to protect your personal information with . 

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through .

Different Business Structures and Taxes Simplified

Sole Proprietorship

Owner and business are the same for tax purposes

  • Pass-through taxation (profits will pass through to its members to be reported on their personal tax returns)
  • Single-member (owner) company
  • Informal business structure
  • No liability protection (if the business is sued, you could lose your personal assets)

Partnership

More than one owner, business and owners are the same for tax purposes

  • Pass-through taxation (profits will pass through to its members to be reported on their personal tax returns)
  • Informal business structure
  • No liability protection (if the business is sued, you could lose your personal assets)

Limited Liability Partnership (LLP)

Business is not a separate entity

  • Pass-through taxation (profits will pass through to partners to be reported on their personal tax returns)
  • Corporation and partnership hybrid business
  • Spreads business risk between partners by having a different set of skills and expertise.
  • Limited liability (individual partners are protected when one partner is sued)
  • In some states, may elect S corporation tax status

Limited Liability Company (LLC)

The business is a separate entity from its owners

Corporation (C Corp is the default IRS tax status)

The business is a separate entity from its owners

  • Double taxation
    1. The business is taxed at a flat tax rate (currently 21%)
    2. The shareholders are then taxed on the distributions they receive from the business on their personal tax return at their income tax bracket
  • Formal business structure
  • Includes protection of personal assets
  • Can elect S corp tax status instead of the default C corp status

S Corporation (S Corp)

Not a business structure, it’s an IRS tax classification

  • Tax classification for LLCs and corporations only (in some states LLPs)
  • Asset protection since it’s formal business structure is an LLC or a corporation
  • The business itself is not taxed
  • There is pass-through taxation (as in a default LLC)
  • Owner(s) and shareholders receive distributions - profits, deductions, credits, and losses are passed down to the owner(s)/shareholders
  • Preferred by shareholders due to no double taxation
  • Offers tax savings
    • Owner(s) become employees and have a reasonable salary that pays employment taxes and income tax
    • Distributions pay only income tax at shareholder’s individual tax bracket - leads to tax savings!

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