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What is an S Corp?
An S Corp is a tax classification in which a business elects to be taxed as a pass through entity for federal tax purposes. Instead of the corporation paying federal income taxes on its profits, those profits are “passed through” to the shareholders personal tax returns, and the shareholders pay personal income tax on their share of the profits. This avoids the double taxation problem faced by corporations. And the shareholders personal income tax rates may be lower than the corporate tax rate. 

An S Corp, by itself, is not a business entity. You should first form your business entity to take advantage of limited liability protection, and then you should discuss with your accountant whether electing to be taxed as an S Corp will save you money on taxes. 

What are the requirements for electing S Corp tax status?
In order to elect to be taxed as an S Corp, the business must meet certain requirements:
  • The business must be a domestic, as opposed to a foreign, business entity. 
  • The shareholders generally must be individuals. Certain trusts and estates can also be shareholders in an S Corp, but the shareholders cannot be other business entities.
  • The shareholders cannot be non-resident aliens. 
  • An S Corp can have no more than 100 shareholders.
  • An S Corp can only have 1 class of stock. For example, an S Corp cannot have one class of shareholders with voting rights and another class of shareholders who are silent investors. 
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S Corp owners are also required to pay themselves a “reasonable” salary, i.e. a salary that is comparable to what an employee in a similar position would typically earn. S Corp owners may also distribute additional profits over and above their regular salary.

How does my business elect S Corp taxation?
Assuming you have met with your accountant who has advised you to elect S Corp tax status based on your particular tax situation, the business can elect to be taxed as an S Corp by filing Form 2553 with the IRS. The form must be signed by all of the owners of the business. 

How do I switch from LLC to S Corp?
An S Corp is not a business entity; it is only a tax status. Your business can be both an LLC (for liability purposes) and elect to be taxed as an S Corp for tax purposes. 

Can my single-member LLC be an S Corp?
Yes. By some estimates, approximately 70% of S Corps are owned by a single individual. Your accountant may advise you to elect S Corp tax status for your single-member LLC to save on some of the self-employment taxes you are currently paying.

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