Overview and Shareholder Requirements
An S corporation can have one to 100 shareholders. 70% of S corporations have one owner. The owner decides their salary. S corporation shareholders must be individuals, certain trusts and estates, or tax-exempt organizations. Partnerships, corporations, and nonresident aliens cannot be shareholders. The business is its own entity. The owner is the sole shareholder and an employee. A spouse can be a shareholder.
An S corp must follow corporate formalities set by its state statute. It must divide profits and losses based on ownership percentage. An LLC can divide profits however its owners want.
S corp treatment benefits individual owners who are U.S. citizens, residents, or certain noncitizens. Family members count as one owner. All shareholders must have the same stock type.
Compensation and Liability
S corps don’t pay corporate taxes on their profits, which means they pass the profits to the owners and are only taxed once. An S corp can pay profits as salaries and distributions. But salaries must be reasonable. An S corp may own an LLC to take advantage of LLC flexibility in dividing profits.
Sole proprietors have unlimited liability. S Corps offer limited liability protection by separating personal and business assets. However, the corporate veil of an S Corp may be lifted, making owners personally liable.
Taxation and Entity Types
Liability protection: An s corp protects the owners from the debts and liabilities of the business in most cases. Self-employment taxes: An s corporation is required to pay owners a reasonable salary on which they will pay taxes on. This means you get to avoid self-employment taxes altogether because technically, you aren’t self-employed. Credibility: Forming an S corporation gives your business more credibility than you would have otherwise. Ownership transfer: Transferring ownership of an S corp is easy and doesn’t require any complicated documents, accounting rules, or tax penalties.
There is nothing inherently “better” about a C corp, S corp, or LLC. How one should incorporate really depends on the nature, size, and goals of the business in question.
LLCs have more to do with legal status, while S corps have more to do with your taxes. Because they fall into different categories, it’s possible for the same business to be both an LLC and an S corp.
If a C-Corp makes a profit and wants to distribute dividends to its shareholders, it first has to pay taxes at the corporate rate, and then shareholders pay taxes at their individual rate. But as an S-corp owner, you’re only taxed once, subject to your personal tax rate.
Eligibility and Advantages of Single Ownership
Can a single owner be an S Corp?
A sole owner can be an S Corp. S corporation shareholders must be individuals, certain trusts and estates, or tax-exempt organizations.
Both S Corporations and single-member LLCs can be taxed as pass-through entities. One of the biggest differences is that S Corps require considerably more paperwork.
In an S-Corp, income passes through as personal income. Therefore, without restrictions, it would be possible for a foreign person who’s not required to pay US taxes to funnel money to themselves via the S-Corp and completely avoid paying any taxes.
An “S” corporation can only have one class of stock. An S Corporation can have 1 to 100 shareholders. The only way an S corporation can have more than 100 shareholders is when some of the shareholders are family members.