# S corporation

> A tax election, not a company type: a corporation or LLC taxed as a pass-through, if it fits the eligibility rules.

Source: https://lopifi.com/learn/business-entity-types-explained/s-corporation
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is an 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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/schedule-k-1). To qualify it needs no more than 100 shareholders, all of them eligible, and one class of stock.

> “Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.”

— [IRS, S corporations](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations), S corporations — eligibility and Form 2553

**S corporation**
- Pro: One layer of income tax.
- Pro: Profit beyond reasonable pay isn't subject to self-employment tax.
- Pro: Keeps the corporate liability shield.
- Con: No preferred stock, no venture fund, no nonresident alien owner.
- Con: Owners who work in it must be paid reasonable compensation through payroll.
- Con: 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.

An S corporation.

Eligibility, the Form 2553 deadline and the salary question are their own lesson: [the S corporation election](https://lopifi.com/md/learn/s-corporation-election).

## Where this page's rules come from

- [IRS, S corporations](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations) — S corporations — eligibility and Form 2553 (irs)
- [26 U.S.C. §1361(b)(1), (c)(4)](https://www.law.cornell.edu/uscode/text/26/1361) — Small business corporation: no more than 100 shareholders, eligible shareholders only, one class of stock (statute)
- [Instructions for Form 2553 (Rev. December 2020), When To Make the Election](https://www.irs.gov/instructions/i2553) — Form 2553 — when to elect, and relief for a late election under Rev. Proc. 2013-30 (irs)
- [Wikipedia, “S corporation”](https://en.wikipedia.org/wiki/S_corporation) — S corporation (reference)

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Part of:** [The entity menu](https://lopifi.com/md/learn/business-entity-types-explained) — 3 min
- **Terms taught:** [S corporation](https://lopifi.com/md/glossary/s-corporation), [Form 2553](https://lopifi.com/md/glossary/form-2553), [Reasonable compensation](https://lopifi.com/md/glossary/reasonable-compensation)
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