Updated: February 26, 2026
An S Corporation is a business that has elected a special tax status with the IRS to avoid double taxation. Instead of paying corporate income tax at the entity level like a traditional C Corporation, an S Corporation allows profits, plus certain losses, to pass through directly to shareholders’ personal tax returns.
An S Corporation is not a separate type of legal entity formed at the state level. Instead, it is a federal tax election available to eligible corporations and LLCs. To receive S Corporation status, a business must file Form 2553 with the IRS after forming as either a corporation or an LLC.
According to CPA and CFA Tom Brock, a frequent OnPay contributor, business owners should weigh several important considerations before electing S Corp status.
“One of the primary advantages of an S Corp is pass-through taxation, which allows income to be taxed once at the shareholder level rather than at both the corporate and individual levels. S Corp owners may also reduce overall employment tax exposure by splitting income between a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax).”
— Tom Brock, CFA, CPA
In addition, S Corps provide strong personal liability protection and may be viewed as more formal or established by investors, creditors, and business partners.
“S Corps must meet strict eligibility and governance requirements. They are limited to 100 shareholders, all of whom must generally be U.S. citizens or residents, and may issue only one class of stock. They must also maintain corporate formalities such as bylaws, board meetings, and detailed recordkeeping, which can increase administrative complexity compared to other structures.”
— Tom Brock, CFA, CPA
Although S Corporations benefit from pass-through taxation, they must still comply with state corporate formalities, including maintaining corporate records and meeting governance requirements.
Owners who actively work in the business must pay themselves a reasonable salary through payroll. That salary is subject to employment taxes. Additional profits may be distributed to shareholders and are generally not subject to self-employment tax.
Businesses that elect S Corporation status typically file Form 1120-S annually and issue Schedule K-1 to shareholders. To qualify, an S Corporation must meet IRS requirements, including having no more than 100 shareholders, issuing only one class of stock, and limiting shareholders to eligible individuals and entities.
“After consulting with my accountant, I filed for S Corporation status to potentially lower my tax burden as profits increased.”
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