Form Your S Corporation Quickly, Easily, and Affordably

S Corporations are especially beneficial for:

• Small and medium-sized businesses that generate consistent profits and want to minimize self-employment taxes
• Professional service firms like consultants, designers, agencies, medical practices where the owners are actively involved in daily operations.
• Businesses that plan to distribute profits to owners, rather than reinvesting heavily in growth, tend to benefit most
• Companies expecting venture capital or large outside investment may be better served as C Corporations, since S Corps have shareholder restrictions

• Must be filed as a U.S. corporation
• Can maintain only one class of stock
• Is limited to 100 shareholders or less
• Shareholders must be individuals, estates, or certain qualified trusts
• Requires each shareholder to consent in writing to the S Corporation election
• Requires each shareholder to have a US Social Security Number
• Requires each shareholder to be a US Citizen or permanent resident alien with a valid United States Social Security Number
• Must have a tax year ending on December 31

Certain industries and entity types are prohibited. For example, banks, insurance companies taxed under Subchapter L, and domestic international sales corporations (DISCs) are not allowed to elect S Corporation status. Additionally, any business that does not meet shareholder or stock class restrictions is ineligible.

No federal law requires a minimum income threshold for electing S Corporation status. However, since S Corporations must pay reasonable compensation to shareholder-employees, it is usually only cost-effective when the business generates enough profit to justify both a salary and distributions. Many tax advisors suggest that S Corps make sense once net income exceeds roughly $40,000 to $50,000 annually.

A Partnership is a pass-through entity where profits and losses flow directly to partners. Partners generally pay self-employment tax on all earnings. In an S Corporation, income is split between salary (subject to payroll tax) and distributions (not subject to self-employment tax), which can lower the overall tax burden. Partnerships also lack corporate governance requirements. 

Keep leaning: Can a Partnership Elect to Be an S Corporation?

Yes, an LLC can elect to be taxed as an S Corporation. By default, an LLC is taxed either as a Sole Proprietorship (if single-member) or as a Partnership (if multi-member). This allows LLC owners to benefit from S Corporation tax treatment, such as reducing self-employment taxes by splitting income between salary and distributions. It is important to remember that this election changes only the tax classification, not the legal structure of the LLC.

A Sole Proprietorship is an unincorporated business owned by one person. There is no legal distinction between the owner and the business, meaning the owner is personally liable for debts. An S Corporation is a separate legal entity that provides liability protection for its owners.

Yes. A single-member LLC can elect to be taxed as a corporation by filing IRS Form 8832 and then elect S Corporation status with Form 2553. This allows the LLC owner to be treated as both an employee (receiving salary) and shareholder (receiving distributions).

Keep learning: Can a Single-Member LLC Be an S Corporation?

Both S Corporation and a C Corporation are incorporated business structures, but there are a few differences between the two:

• A C Corporation pays taxes at the entity level and again at the shareholder level when dividends are distributed (double taxation)
• An S Corporation avoids double taxation by passing income through to shareholders
• A C Corporations have fewer restrictions on ownership and are preferred for larger businesses seeking investment

Keep learning: C Corporation vs. S Corporation

An LLC is a legal entity that provides liability protection and flexible tax treatment. By default, LLCs are taxed as Sole Proprietorships or Partnerships, but they can elect to be taxed as an S Corporation. The S Corporation is not a separate legal structure, it is a tax designation.

Keep learning: S Corporation vs. LLC

Yes! You can form an S Corporation in any state, regardless of where you live or operate your business. However, if you choose to incorporate in a state where you do not actually conduct business, you will likely need to foreign qualify in your home state, which often involves additional paperwork, registered agent requirements, and fees in both states.

Some businesses choose states like Delaware or Nevada for their business-friendly laws, but this can increase costs if the company must also qualify in its operating state. Most small businesses benefit from incorporating in their home state where the bulk of their business activity occurs.

The majority of states automatically recognize the federal S Corporation election, but some do require additional filings. For example:

• New York requires Form CT-6
• New Jersey historically required a separate election but now automatically honors the federal election
• Utah corporations must attach the IRS acceptance letter to their first state return
• Pennsylvania and Wisconsin recognize the federal election but allow shareholders to opt out with state forms
• District of Columbia, Louisiana, Tennessee, and Texas, may have additional requirements or do not recognize the S Corporation election in the same way due to their tax structures

Business owners should carefully review their state’s Department of Revenue guidance or consult a tax professional to ensure compliance.

At the federal level, S Corporations generally do not pay income tax at the entity level. Instead, business income, losses, deductions, and credits pass through to shareholders, who report them on their individual tax returns. Shareholders then pay tax at their personal income tax rates. However, there are exceptions: S Corporations may be subject to certain entity-level taxes, such as the built-in gains tax or excess passive income tax. Additionally, some states impose their own franchise or income taxes on S Corporations regardless of pass-through status. For instance, California imposes a minimum $800 franchise tax.

S Corporations must carefully balance payroll and distributions. Shareholder-employees are required to take a reasonable salary for their work, and these wages are subject to federal payroll taxes (Social Security and Medicare). Once reasonable compensation has been paid, additional profits may be distributed to shareholders as dividends, which are not subject to self-employment tax. This creates a tax savings advantage compared to sole proprietorships or partnerships. However, improper classification of wages as distributions can result in IRS penalties, so careful planning and payroll compliance are essential.

Yes! Every C Corporation, S Corporation, Professional Corporation, and Limited Liability Company (LLC) is required to have a registered agent in its state of formation. If you operate in multiple states, you will need a registered agent in each of those states as well. Many business owners hire a professional registered agent service (like CorpNet) to manage this process easier.

This refers to fringe benefits for S Corporation shareholders who own more than 2% of the company. Unlike employees in C Corporations, these shareholders cannot receive many fringe benefits tax-free. Instead, benefits such as health insurance premiums must be included as taxable wages on the shareholder’s W-2. This rule is designed to prevent small groups of owners from avoiding payroll taxes through untaxed benefits.

Yes. An LLC can elect to be taxed as a Corporation and then file IRS Form 2553 to become an S Corporation. Similarly, a C Corporation can file Form 2553 to change its tax classification to an S Corporation, provided it meets eligibility requirements. 

S Corporations must comply with both federal and state requirements to maintain good standing:

• At the federal level, they must file Form 1120-S annually and issue Schedule K-1 forms to shareholders.
• States may also require annual reports, franchise taxes, or separate tax filings.
• From a governance perspective, S Corporations must maintain bylaws, issue stock certificates, hold annual shareholder and board meetings, and keep minutes of those meetings.

Failure to follow corporate formalities may result in loss of liability protection, exposing shareholders to personal liability.

The IRS requires S Corporation shareholder-employees to pay themselves a ‘reasonable salary’ for the work they perform before taking profit distributions. Reasonable compensation is based on industry standards, job duties, experience, and comparable wages. For example, if similar positions in your field earn $60,000 annually, paying yourself only $10,000 and taking the rest as distributions would likely raise a red flag with the IRS. In practice, many accountants recommend allocating 40–60% of net income to salary, though the actual figure should be supported by data. Failure to pay reasonable compensation may lead to IRS penalties and reclassification of distributions as wages, with back taxes owed.

It may. Filing as an S Corporation requires preparing IRS Form 1120-S, maintaining payroll compliance, and issuing Schedule K-1s to shareholders. These additional requirements often increase accounting costs compared to a Sole Proprietorship or Partnership. Keep in mind the potential tax savings often outweigh the higher compliance expenses.