S Corporation (S-Corp)
Company formation in United States
The S-Corp is best suited for: US-resident small business owners, Professionals seeking payroll tax savings, Businesses with US-citizen shareholders only. Pass-through taxation: profits and losses flow to shareholders' personal tax returns. No entity-level federal tax (except in certain states). Owner-employees must take a "reasonable salary" subject to FICA (15.3% total). Distributions above salary are subject to income tax but not FICA. State-level treatment varies — some states don't recognize S-Corp election. File Form 1120-S annually.
- US-resident small business owners
- Professionals seeking payroll tax savings
- Businesses with US-citizen shareholders only
Key Facts
Step-by-Step Formation Process
Form a C-Corp or LLC
S-Corp is a tax election, not a separate entity type. First form a corporation or LLC in your chosen state.
Verify S-Corp eligibility
Max 100 shareholders, all must be US citizens or residents. One class of stock only. No corporate or foreign shareholders.
File IRS Form 2553
Submit S-Corp election to the IRS. Must be filed within 75 days of incorporation or by March 15 for the current tax year.
Set up payroll
S-Corp owner-employees must pay themselves a "reasonable salary" via payroll. Set up payroll processing and withholding.
Obtain EIN and open bank account
If not already done during LLC/Corp formation.
Required Documents
- Underlying entity formation documents (Articles of Incorporation or Articles of Organization)
- IRS Form 2553 (S-Corp Election)
- EIN confirmation
- Shareholder consent forms
- Payroll registration documents
Cost Overview
Tax Treatment
Pass-through taxation: profits and losses flow to shareholders' personal tax returns. No entity-level federal tax (except in certain states). Owner-employees must take a "reasonable salary" subject to FICA (15.3% total). Distributions above salary are subject to income tax but not FICA. State-level treatment varies — some states don't recognize S-Corp election. File Form 1120-S annually.
Pros & Cons
- Pass-through taxation — no corporate-level tax
- Saves on self-employment tax compared to default LLC taxation
- Distributions above reasonable salary are not subject to payroll tax (15.3% savings)
- Well-understood structure for US small businesses
- Can build corporate credit history
- Only US citizens and residents can be shareholders
- Maximum 100 shareholders
- One class of stock only — limits fundraising flexibility
- Reasonable salary requirement — IRS scrutiny on low salaries
- Must run payroll (added cost and complexity)
- Not suitable for foreign entrepreneurs
- Cannot be owned by another corporation, LLC, or trust (with limited exceptions)
Other Structures in United States
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Get StartedThis content is educational and does not constitute legal or tax advice. Always consult a qualified professional for your specific situation. Data last verified March 2026.