S corporation
A tax election, not a company type: a corporation or LLC taxed as a pass-through, if it fits the eligibility rules.
An S corporation isn't a different kind of company. It is a corporation — or an LLC eligible to be treated as one — that has filed Form 2553 to be taxed as a pass-through. It files Form 1120-S, pays no income tax on ordinary profit, and gives each shareholder a Schedule K-1. To qualify it needs no more than 100 shareholders, all of them eligible, and one class of stock.
S corporation
- Good at
- One layer of income tax.
- Profit beyond reasonable pay isn't subject to self-employment tax.
- Keeps the corporate liability shield.
- Watch for
- No preferred stock, no venture fund, no nonresident alien owner.
- Owners who work in it must be paid reasonable compensation through payroll.
- Payroll, a Form 1120-S and K-1s every year.
- Best for
- A profitable owner-operated business with US individual owners and no outside investors.
Eligibility, the Form 2553 deadline and the salary question are their own lesson: the S corporation election.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §1361(b)(1), (c)(4) (opens in a new tab)Small business corporation: no more than 100 shareholders, eligible shareholders only, one class of stockFree to read
- IRS guidance
- IRS, S corporations (opens in a new tab)S corporations — eligibility and Form 2553Free to read
- Instructions for Form 2553 (Rev. December 2020), When To Make the Election (opens in a new tab)Form 2553 — when to elect, and relief for a late election under Rev. Proc. 2013-30Free to read
- Background reading — not an authority
- Wikipedia, “S corporation” (opens in a new tab)S corporationFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- S corporationA domestic corporation, or an LLC eligible to be treated as one, that has elected on Form 2553 to pass its income, losses, deductions and credits through to its shareholders. No more than 100 shareholders, all of them individuals other than nonresident aliens, estates, or certain trusts and exempt organizations, and one class of stock. Files Form 1120-S
- Form 2553The S corporation election, signed by every shareholder and filed no more than 2 months and 15 days after the start of the tax year it is to take effect, or at any time in the year before. An eligible LLC files it without Form 8832; a late election can be rescued under Rev. Proc. 2013-30
- Reasonable compensationThe wages an S corporation must pay a shareholder who works in the business, for that work, before it makes non-wage distributions to them. A C corporation's founder on payroll is an employee too, but the rule is the S corporation's