What is an S-Corporation?

An “S-Corporation” is a regular Corporation that has elected with the IRS to be considered a “pass-thru entity”, where all income and losses are passed through to the individual shareholders personal returns.  Thus, an S-Corporation does not pay any Federal Income Taxes.  By electing S-Corporation status, a small business owner can avoid the double taxation of dividends.  In addition, forming a Corporation and electing S-Corporation status, can save a sole-proprietorship thousands of dollars in Social Security and Medicare Taxes.  However, S-Corporation owners who perform services for the company must first pay themselves a “reasonable salary” before taking distributions.  The Salary portion is subject to Social Security and Medicare Tax.  An LLC (Limited Liability Company) can also elect to be taxed as an S-Corporation.