What Is an S Corp?
An S Corporation is a type of corporation that passes corporate income, losses, tax deductions and tax credits along to its shareholders, all without needing to pay separate corporate taxes. The formation of S Corps is also relatively small compared to larger corporations and aren't permitted to have more than 100 shareholders.
S Corp Requirements
In order to be classified as an S Corp, a corporation must meet a specific set of requirements as defined by the Internal Revenue Service (IRS). Namely, it needs to:
To officially become an S Corp, a corporation needs to file an election via Form 2553. If the IRS grants its request, it will be able to enjoy the pass-through taxation benefits that all S Corps do.
S Corp Pros and Cons
Just like every other type of business structure, S Corps have their own unique set of advantages (and limitations). Use the breakdown below to help decipher if opening an S Corp is the right move for your business.
Advantages of an S Corp
For business owners looking to save money on taxes, S Corps can be nothing short of ideal. After all, no one likes paying more taxes than they need to.
Curious to see how forming an S Corp could help you? If you choose to go the S Corp route, you'll receive benefits such as:
Limitations of an S Corp
Entrepreneurs know better than anyone that nothing is perfect — from finding the right employees to raising capital to staying competitive, business ownership is a challenging endeavor.
S Corps are no different, and despite their numerous advantages also have a few limitations. These include:
What's the Difference Between an S Corp, C Corp and LLC?
Want to assess a C Corporation vs. S Corporation or discover the difference between an S Corp vs. an LLC? Our side-by-side comparison can help.
Business Comparison Chart
How to Form an S Corp
Ready to start filing an S Corp? Form your S Corp now with Incfile's service — just select your state, tell us about your business and we'll:
Of course, you could always go to your Secretary of State's website, hunt down the required forms, fill out the forms correctly and file your Articles of Organization yourself. But as an entrepreneur, you probably have about 100 other things on your to-do list — if that's the case, our service can help.
Unfortunately, the "S" in S Corp doesn't stand for "Super" or "Splendid." Instead, it's referencing Subchapter S of the Internal Revenue Code. (We still think S Corps are super and splendid, though.)
Business owners may choose to form an S Corporation for a number of reasons, but the primary one is arguably the potential for reduced taxes. If you're not sure if you could save money by forming an S Corp, find out with our S Corp tax calculator.
As pass-through entities, S Corps work by passing their income (along with their losses, deductions and credits) on to its shareholders, thus avoiding the need to pay federal corporate tax altogether.