An S corporation is not a separate type of company but a US federal tax election available to eligible corporations and LLCs. Named after Subchapter S of the tax code, it lets a business pass its profits, losses and credits directly to shareholders, avoiding the double taxation that hits a C corporation.
The signature advantage is payroll efficiency. An owner-employee must take a reasonable salary subject to employment taxes, but any remaining profit is distributed as a shareholder dividend that escapes self-employment tax. This can save a working owner thousands each year compared with being fully self-employed.
- Limited to 100 shareholders, all generally US persons
- Only one class of stock allowed
- Profits taxed once, on shareholders' returns
Example: a consultant nets 150,000 dollars, pays herself a 90,000 dollar salary (with payroll tax) and takes the other 60,000 dollars as a distribution free of self-employment tax, trimming her overall bill.
There is no exact equivalent in the UK or Germany, where a limited company or GmbH always pays corporation tax first. Test the salary-versus-distribution split with our S corporation tax calculator.