What is S Corporation?
Definition An S corporation is a corporation or LLC that elects Subchapter S status so profits and losses pass through to the owners' personal returns instead of being taxed at the entity level, avoiding the double taxation of a C corporation. It files Form 1120-S and issues each shareholder a Schedule K-1. Owners who work in the business must be paid reasonable compensation as W-2 wages, and ownership is limited to 100 eligible shareholders and one class of stock.
The salary-plus-distribution structure can lower self-employment tax for profitable owner-operated businesses, making the S election one of the most common tax-savings strategies firms evaluate.