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S corporation (S corp)

business

Also known as: S corp

Written byNancy Ashburn

Fact-checked byThe Editors of Encyclopaedia Britannica

Photo illustration: Stacks of money moving back and forth.

The money passes through to the shareholders.

Also Known As:: S corp

A corporation is a legal form of business organization, chartered by a state, that exists as a separate entity from its owners. A corporation with S corp status is not a separate type of legal business entity—it is a special tax status available to certain U.S. corporations under subchapter S of the Internal Revenue Code. An S corporation retains the liability protection and formal structure of a standard C corporation but is taxed more like a partnership or limited liability company (LLC), with profits and losses passing through to shareholders’ personal tax returns.

Part of a bigger picture

An S corporation is just one of the many business structures available. Learn how sole proprietorships, partnerships, LLCs, and others compare in Britannica Money’s guide to business structure types.

Eligibility and formation of an S corp

To elect S corp status, a business must first be incorporated under state law as a regular corporation. It then files IRS Form 2553, signed by all shareholders, to be taxed under subchapter S. Not all corporations qualify—S corps must:

S corp vs. C corp in brief

C corp: Separate taxable entity; corporate profits are taxed, then dividends are taxed again at the individual shareholder level.
S corp: Pass-through taxation; income is taxed only once at the shareholder level.

Both offer limited liability, perpetual existence, and a formal corporate governance structure.

Be a domestic (U.S.) corporation
Have no more than 100 shareholders
Have only allowable shareholders (individuals, certain trusts, and estates—not partnerships or corporations)
Issue only one class of stock
Avoid certain restricted industries, such as specific financial institutions and insurance companies

Tax treatment

An S corp generally pays no federal income tax at the corporate level. Instead, each shareholder reports their share of the company’s income, deductions, and credits on their individual return using Schedule E and a Schedule K-1. Shareholders must pay personal tax on distributed and undistributed income alike.

Some states do not recognize the S corp election for state tax purposes and instead tax these entities as C corporations.

This article was most recently revised and updated by Nancy Ashburn