Advantages
- Strong personal liability protection
- No double taxation — income taxed once on personal returns
- Credibility with banks and institutional lenders
- Owner-employees can split salary + distributions strategically
Disadvantages
- More complex and costly to form than an LLC
- Limited to 100 shareholders — U.S. citizens/residents only
- Must run payroll for owner-employees — more rigorous accounting
- Cannot have corporate shareholders or foreign investors
Tax Filing
- Files Form 1120-S annually
- Issues Schedule K-1 to each shareholder
IRS requires a "reasonable salary" for owner-employees — actively monitored.
SE Tax Advantage ✅
- Properly structured salary + distributions may significantly reduce self-employment tax
- One of the most common reasons growing businesses elect S Corp status
Best For
- Growth-stage businesses bringing in outside investors
- Owners seeking both liability protection and tax efficiency
LLC → S Corp Election
Many businesses start as an LLC and later elect S Corp taxation once revenue justifies the additional payroll complexity. A CPA can help you model the break-even point.