What is an S Corp?

An S Corporation (S Corp) is a special type of business entity recognized by the Internal Revenue Service (IRS) in the United States. It allows business owners to enjoy the limited liability protection of a corporation while avoiding the double taxation that usually applies to traditional C Corporations. Instead of the company paying corporate taxes, the profits and losses “pass through” directly to the shareholders, who report them on their personal tax returns.

How an S Corp Works

To qualify as an S Corp, a business must first register as a corporation in its state and then file Form 2553 with the IRS to elect S Corp status. There are specific requirements — for example, an S Corp can have no more than 100 shareholders, all of whom must be U.S. citizens or residents. It can issue only one class of stock.

Advantages and Considerations

S Corps are popular with small business owners because they can reduce self-employment taxes and offer credibility and structure. However, they also come with strict compliance rules, additional paperwork, and limits on ownership that may not suit every business.

Summary

An S Corporation (S Corp) is a U.S. business entity recognized by the IRS that provides limited liability protection and avoids the double taxation of C Corporations by passing profits and losses directly to shareholders. To qualify, businesses must register as a corporation and file Form 2553 with the IRS, adhering to rules such as a limit of 100 U.S. resident shareholders and a single class of stock. While S Corps offer benefits like reduced self-employment taxes, they also involve strict compliance rules and ownership limitations.

Key Facts