S Corporations, Explained

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.

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).

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.

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.

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

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:

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.