Entity type
An S-Corp is a tax election, not a separate entity type — it can reduce self-employment tax for profitable US-based owners. It has strict eligibility rules.
What an S-Corp really is
An 'S-Corp' is a tax status you elect for an LLC or corporation by filing Form 2553 with the IRS. Its main appeal: owners who actively work in the business can split income between salary and distributions, potentially lowering self-employment tax.
It only makes sense once your business is consistently profitable enough that the payroll and accounting overhead is worth the savings.
- Potential self-employment tax savings
- Pass-through taxation (no corporate double tax)
- Requires running reasonable owner payroll
Strict eligibility — read this first
S-Corp status has hard limits: shareholders must be US citizens or residents, there can be at most 100 shareholders, and only one class of stock is allowed. This means non-US founders generally cannot elect S-Corp status.
If you're a non-resident, an LLC (or C-Corp for venture plans) is the right path. If you're a profitable US-based owner, we can help you evaluate and file the S-Corp election.
How your S-Corp is taxed (federal)
An S-corp files Form 1120-S and passes income through to shareholders; owners must run reasonable payroll.
S-corp shareholders must be US citizens or resident aliens, so the election is generally UNAVAILABLE to non-resident founders. Non-US owners should use an LLC or a C-corp.
- The entity files Form 1120-S and issues a Schedule K-1 to each shareholder; income passes through with no corporate tax.
- Owners active in the business must take a 'reasonable salary' through payroll (Forms 941/940, W-2); remaining profit can be taken as distributions, which can cut self-employment tax.
- You elect S-status by filing Form 2553 with the IRS (generally within 75 days of formation or the start of the tax year).
- Only worth it once the business is reliably profitable enough to cover payroll and extra accounting.
Annual compliance & filings
All of its underlying entity's formalities PLUS running payroll and keeping the S-election valid.
- Keep up the underlying entity's records (operating agreement or bylaws/minutes, as applicable).
- Run reasonable owner payroll and file payroll returns (941/940, W-2) plus the annual Form 1120-S.
- Maintain eligibility every year: US-resident shareholders only, ≤100 shareholders, one class of stock.
- File the state annual report / franchise tax and keep a registered agent.
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