- Limited Liability: Yes
- Taxation: One Level
- Ownership: Maximum of 100, Numerous Limitations
- Typical Complexity / Cost: Medium
- Capital Structure: One Class of Stock
- Ability to Take Public: No
- Employee Compensation Methods: Mostly Favorable With Limitations Due to One Class of Stock Limitation
S-corporations are technically not a different type of entity, rather, an S-corporation is just a corporation that has made an “S election” to be taxed under subchapter S of the Internal Revenue Code. Instead of paying corporate level taxes, the taxable income and tax attributes of an S-corporation are passed directly to its shareholders, meaning that only one level of tax is paid on taxable income earned by the business. The manner in which an S-corporation is taxed is similar, but not identical, to the manner in which LLCs and partnerships are taxed, however, unlike LLCs and partnerships, S-corporations are often advantageous with respect to reducing self-employment taxes, which will be discussed in detail in a separate post.
The tax treatment of S-corporation is often popular with business owners, however, this does not come without certain costs. To make a valid S election, ownership is restricted to no more than 100 shareholders, none of whom may be foreign or organized as entities (with certain exceptions). In addition, an S-corporation may only issue one class of stock, preventing use of shares other than common stock. However, while these limitations are often a barrier for larger businesses, they are frequently less of a concern for small and closely held businesses.