Key Takeaways

  • S corp companies are regular corporations that elect S corporation tax status under IRS Subchapter S to avoid double taxation.
  • Profits and losses pass through to shareholders’ personal tax returns, making S corps ideal for small to mid-sized businesses.
  • Many industries—consulting, real estate, professional services, and tech startups—use the S corp structure for its tax efficiency and liability protection.
  • Eligibility requirements include U.S. incorporation, a limit of 100 shareholders, and only one class of stock.
  • While S corps offer tax advantages, they require careful compliance with IRS and state regulations.

What are some S corporation business examples?  An S corporation (a.k.a. S Corp) is an Internal Revenue Service tax classification.

This means the subchapter S taxation election has been made to treat the company as a pass-through entity for tax purposes. A common S corporation business example that does this is a high paying consultant.

The tax structure of an S corporation is like a partnership where the income or loses go to the individual shareholder's tax return rather than getting taxed at both a corporate and individual level. This can be an advantage for those who are self-employed and earn a lot more than their peers.

An Example Of S Corporation Taxation

To help you understand how S corporation taxes work, let's look at Bens, Inc.

Formed as an S corporation in Florida, there are two shareholders. Gemma owns 60% of the corporation, and Sam 40%.

In 2016, the company had a net profit of $10 million. Therefore, when Gemma and Sam are filing their personal tax returns, Gemma will report $6 million in income, and Sam $4 million.

Note: The corporation might choose to not distribute the income to the owners, rather investing it back into the business. As an S corporation, Gemma and Ben will still be taxed on their profits whether it is distributed or not.

Real-World Examples of S Corp Companies

S corp companies span a wide range of industries—from local service firms to nationally recognized brands. These businesses choose S corporation status to balance limited liability protection with the tax benefits of pass-through income.

Common examples of S corp companies include:

  • Consulting and professional service firms such as accounting, legal, or engineering practices where owners can pay themselves a reasonable salary and take additional profit distributions at lower tax rates.
  • Medical and dental practices that use the S corp structure to limit liability while minimizing self-employment taxes.
  • Marketing and creative agencies, where multiple owners or partners share profits and want flexibility in how income is distributed.
  • Real estate firms or holding companies that use an S corp for management operations while keeping investments in separate entities.
  • Technology startups and software developers that prefer pass-through taxation until they grow large enough to benefit from a C corporation structure.

For example, an independent consultant earning $150,000 annually might designate $80,000 as salary (subject to payroll taxes) and take the remaining $70,000 as a dividend, reducing overall tax liability. Similarly, a small digital agency owned by two shareholders can divide profits according to ownership percentages while avoiding double taxation.

Eligibility Criteria for an S Corporation

Not all corporations can form an S corporation. In order to elect the S corporation status with the IRS, the following must be in place:

  • The company must be a domestic corporation.
  • There's a maximum of 100 shareholders.
  • The corporation can issue only one form of stock.

If these are not met, then you risk being treated as another type of corporation when taxes are due. The same goes if anything changes over time in regards to the business structure, an S corporation can have its eligibility taken away

How to Form and Maintain an S Corp Company

Starting an S corporation involves both state-level and federal actions. Business owners first form a C corporation by filing Articles of Incorporation with their state’s Secretary of State. Afterward, they must file Form 2553 with the IRS to elect S corporation status.

To remain compliant, S corp companies must:

  1. Maintain only one class of stock.
  2. Limit shareholders to 100 individuals, all of whom must be U.S. citizens or residents.
  3. Adopt bylaws, hold annual shareholder meetings, and record minutes.
  4. File an annual report and pay applicable state franchise or filing fees.

Failure to meet these criteria could cause the IRS to revoke S corporation status, subjecting the company to corporate-level taxation.

The Benefits Of An S Corporation

There are a number of benefits we have touched on already for choosing to incorporate as an S corporation. The following are five of the biggest S corporation benefits:

  1. Income is only taxed once. As an S corporation doesn't pay any taxes, the only tax is at a personal level when profits and losses are paid to shareholders.
  2. When an individual becomes a shareholder of an S corporation, their personal assets are protected. They are separated from business assets meaning business liabilities cannot affect personal assets.
  3. With a limit of 100 shareholders, S corporations have a family-friendly feel. That doesn't mean the business cannot grow exponentially.
  4. If an S corporation has no inventory, they can use simple accounting methods. The cash method can be used which is not as difficult as the accrual method.
  5. As shareholders are eligible to be paid as regular company employees, there are some benefits of business expense write-offs. Always consult with a tax/accounting professional in these situations, but health and other types of insurance are popular business expenses written off by S corporations.

Why Businesses Choose the S Corp Model

S corp companies are especially appealing to small and mid-sized businesses seeking both tax efficiency and personal liability protection. Compared with sole proprietorships or partnerships, S corporations provide a clear separation between the business and the owners’ personal assets.

Key advantages include:

  • Pass-through taxation: Income flows directly to shareholders’ individual returns, avoiding the double taxation faced by C corporations.
  • Self-employment tax savings: Owners who work for the business can pay themselves a “reasonable salary” and classify additional profits as distributions not subject to payroll taxes.
  • Investment flexibility: The ability to attract up to 100 shareholders makes it easier to raise funds from family investors or partners without losing control.
  • Perpetual existence: The corporation continues to exist even if an owner leaves, ensuring business continuity.
  • Enhanced credibility: Forming as an S corp often signals stability and professionalism to clients and lenders.

These benefits make the structure ideal for service-based entrepreneurs, family-owned firms, and professional practices that generate steady income and want predictable tax treatment.

The Downsides Of An S Corporation

If you're considering forming an S corporation, you need to know the downsides as well.

  1. S corporations aren't recognized in all states.
  2. You still need to pay fees and follow certain rules as an S corporation. This means filing documents like Articles of Incorporation and minutes at state and federal level. There is also the requirement to hold regular shareholder meetings.
  3. While the no double taxation is great, shareholders of a C corporation are only required to pay taxes on income they receive from the business. S corporation shareholders must pay taxes on the company income, whether that was distributed to shareholders or reinvested back into the business.
  4. All shareholders of an S corporation must receive the same class of stock.
  5. When an S corporation is formed, all owners and officers must be paid a "reasonable" salary according to the IRS. Even if the company is not profitable, and isn't expected to be right away, a "reasonable" salary is an amount that an individual with the skills used can be expected to be paid on the open job market for a similar position.

Common Challenges Faced by S Corp Companies

While S corps offer notable advantages, they also come with administrative and tax complexities that business owners must manage carefully:

  • Strict compliance rules: Missing an IRS filing or exceeding shareholder limits can terminate S corp status.
  • Reasonable compensation requirements: Owners must pay themselves fair market salaries; underpaying can trigger IRS audits or penalties.
  • Limited ownership flexibility: Non-U.S. residents and corporations cannot be shareholders, restricting potential investors.
  • Fringe benefit restrictions: Certain benefits, such as health insurance for more than 2% shareholder-employees, are taxable to the individual.
  • State-level variations: Not all states recognize S corps the same way—some impose franchise or entity-level taxes (e.g., California’s 1.5% S corp tax).

Despite these drawbacks, many successful small businesses continue to thrive as S corp companies due to the overall tax efficiency and ownership control the structure provides.

Frequently Asked Questions

  1. What types of businesses typically form an S corp?
    Professional service firms, consultants, medical practices, real estate management companies, and small agencies often form S corps for liability protection and tax benefits.
  2. Can large corporations be S corps?
    No. S corps are limited to 100 shareholders and must be U.S.-owned, making them best suited for small to mid-sized private companies.
  3. How is an S corp company different from an LLC?
    An LLC offers flexible management and fewer formalities, while an S corp provides potential payroll tax savings and the ability to issue stock.
  4. What happens if an S corp fails IRS requirements?
    If it violates ownership or filing rules, the IRS can revoke S corp status, converting the business into a C corporation for tax purposes.
  5. When should a business consider switching from S corp to C corp?
    When the company seeks venture capital investment or plans to retain significant earnings for growth, converting to a C corp can be advantageous.

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