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An S Corporation combines the liability protection of a corporation with pass-through taxation. This guide covers everything you need to know about forming and maintaining an S Corp in 2025, with current tax laws and state-specific requirements.
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An S Corporation (S Corp) is a special tax designation that allows corporations to avoid double taxation while maintaining corporate liability protection. Unlike C Corps, S Corps pass corporate income, losses, deductions, and credits through to shareholders.
An S Corp is not a business entity type - it's a tax election. You first form a corporation or LLC, then file Form 2553 with the IRS to elect S Corp status.
| Feature | S Corp | C Corp | LLC | Sole Prop |
|---|---|---|---|---|
| Taxation | Pass-through | Double taxation | Pass-through | Pass-through |
| Liability Protection | Yes | Yes | Yes | No |
| Investor Appeal | Medium | High | Medium | Low |
| Self-Employment Tax | Only on salary | Only on salary | On all income | On all income |
| Best For | Profitable small businesses with U.S. owners | Businesses seeking investment or going public | Most small businesses | Very small, low-risk businesses |
First create either:
2025 Tip: Many states now offer same-day online processing for additional fees ($50-$150).
Apply for an Employer Identification Number (free online at IRS.gov). Required for:
Complete and submit IRS Form 2553 to elect S Corp status. Must include:
Critical Deadline: Must file within 75 days of formation or by March 15 for existing businesses.
Even as an S Corp, you must maintain corporate formalities:
Most states automatically recognize federal S Corp status, but some require:
The IRS rejects about 15% of S Corp elections for these reasons:
Business Income
Shareholder Returns
Personal Taxes Paid
The optimal S Corp salary minimizes self-employment tax while remaining "reasonable" per IRS standards. In 2025, we recommend:
These states tax S Corps as regular corporations (check for 2025 updates):
Many states have different S Corp election deadlines than the IRS. For example:
Typical costs include:
Most profitable businesses save far more in taxes than these costs.
Yes! Many LLCs choose S Corp taxation by:
This combines LLC flexibility with S Corp tax benefits.
The IRS requires S Corp owner-employees to pay themselves reasonable compensation for services rendered. Factors considered:
2025 Tip: Document your salary determination process to defend against IRS challenges.
S Corp owners typically receive two types of compensation:
Our S Corporation specialists can handle your entire formation and compliance process:
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