S-Corporation.
A tax election, not an entity. Shrinks your self-employment tax bill.
An S-corp isn't an entity — it's a tax election filed on IRS Form 2553 by an existing LLC or C-corp. It lets profitable owners pay themselves a "reasonable salary" and take the rest as distributions, avoiding self-employment tax on the distribution portion.
How the IRS sees this entity.
Pass-through, with payroll
Profit lands on the owner's personal return. The entity itself pays no federal income tax — the tax knife only cuts once, at personal rates.
What you owe, and when.
Forming the entity is the easy part. Here's the recurring paperwork that keeps it alive.
What this trades, and for what.
- Can save thousands in self-employment tax annually
- Pass-through taxation (no double tax)
- Inherits liability protection from underlying LLC/C-corp
- Legitimizes owner as "employee" for benefit plans
- Must run real payroll (costs $400–$1,200/yr)
- IRS "reasonable salary" scrutiny
- 100-shareholder cap + US-residents only
- Only one class of stock allowed
The founders this fits.
- Established LLC profit over $80k/yr in active income.
- Owner-operators drawing a regular paycheque.
- U.S.-only ownership, single class of stock.
Your profit is under $50k, you have non-US owners, or you plan to raise VC.
Where to actually file.
- Your home state
The S election rides on top of the underlying LLC or C-corp, which should usually be local.
When to move on.
-
Triggered when: Need multiple stock classes or foreign investors.
Revoke the S election; file Form 8832 if changing entity classification.
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Triggered when: Profit fell and payroll overhead now exceeds the savings.
Revoke election via shareholder consent to the IRS.
Related articles.
Still not sure this is the right fit?
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