S Corporation

An S corporation is a corporation (or an LLC that elects corporate treatment) that has filed a valid election under Subchapter S of the Internal Revenue Code to be taxed as a pass-through entity. The company itself generally pays no federal income tax. Instead, profits, losses, and other tax items flow through to shareholders on Schedule K-1 and are taxed on their personal returns. The main appeal for owner-operators is payroll tax savings: an owner who works in the business must take a reasonable W-2 salary, but profits above that salary are distributed free of self-employment tax. Eligibility rules are strict: no more than 100 shareholders, only one class of stock, and shareholders must generally be U.S. individuals, certain trusts, or estates. Partnerships, corporations, and nonresident aliens cannot own S corporation stock.