For business owners looking to minimize their tax burden while maintaining legal protections, Subchapter S Corporations (S Corps) can be an attractive option. Unlike traditional C Corporations, S Corps operate as pass-through entities, meaning profits and losses "pass through" to shareholders without being subject to corporate income tax. Instead, earnings are reported on the owners’ personal tax returns, avoiding the dreaded double taxation that C Corps face.

 

Key Benefits of an S Corp

  1. Avoiding Double Taxation – A C Corporation pays taxes on its income, and then shareholders pay taxes again on dividends. In contrast, an S Corp’s income is only taxed once, at the individual level.
  2. Self-Employment Tax Savings – Unlike sole proprietors or LLC owners who pay self-employment taxes on all net earnings, S Corp owners can pay themselves a reasonable salary and take additional profits as distributions, which aren’t subject to self-employment tax.
  3. Liability Protection – Like a C Corp, an S Corp provides liability protection, keeping personal assets separate from business debts and lawsuits.
 

Requirements to Qualify as an S Corp

  • Must be a domestic corporation
  • Limited to 100 shareholders
  • Shareholders must be U.S. citizens or residents
  • Can only issue one class of stock
  • Certain businesses, like banks and insurance companies, are not eligible
 

Potential Downsides

  • More IRS Scrutiny – S Corp owners must pay themselves a “reasonable salary,” or risk IRS audits for underpaying payroll taxes.
  • Stricter Rules – The 100-shareholder limit and single-class stock restriction can make growth financing more difficult.
 

For business owners making the jump to an S Corp, tax planning and compliance are key. A knowledgeable tax professional can ensure you’re maximizing benefits while staying on the IRS’s good side.

 

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