S Corp

What is an S corporation?

An S corp—or S corporation—is a tax designation granted to certain businesses that allows them to report business income on personal income tax returns. By choosing S corp status, business owners can avoid the double taxation that C corporations are subject to.

But corporations aren't the only business entities that benefit from S corp status. LLCs that are taxed as sole proprietorships or partnerships can instead use the tax designation to avoid paying self-employment taxes.

Filing as an S corp can be a good option for small business owners looking to bypass the federal corporate income tax; however, S corporations can come with a lot of paperwork that may make them less appealing to some.

S corp FAQs

What is the difference between an LLC and an S corp?

Comparing LLCs and S corporations is a little like comparing apples to oranges. An LLC is a type of business entity that offers limited liability protections to owners, while an S corp is a tax designation that helps businesses avoid double taxation and—potentially—self-employment taxes. Both corporations and LLCs can choose to be taxed as an S corporation.

What are the requirements for an S corporation?

Businesses have to meet certain requirements in order to be eligible for S corp status:

• They must have no more than 100 shareholders
• They cannot have owners that are corporations or partnerships, or shareholders with non-resident alien status
• They cannot hold more than one class of stock

What are the disadvantages of filing as an S corp?

S corporations are advantageous for business owners who want to simplify the way they pay federal taxes and potentially save some money, but they aren't the best choice for everyone. For example, if you're a business owner hoping to reinvest some of your business income to fuel future growth of the company, filing as a C corporation might be a better choice. Because S corporations report all business income on the owner's personal tax returns, you'll be stuck paying income tax on all of your profits, not just the money distributed to you.

If you're an owner-employee of an LLC, and you're filing as an S corp in order to avoid paying self-employment taxes, you may also be subject to additional scrutiny by the IRS, which will want to ensure you're paying yourself a fair and reasonable salary and paying Social Security and Medicare taxes the way you should be.

What is the S corp tax rate?

Because S corp income is reported on the owners' personal tax return, business income is taxed at the individual income tax rate, rather than the federal corporate income tax rate. If your business has S corp status, the percentage you'll pay in tax will depend on your personal income tax bracket.