Financial Word of the Day: S Corporation
- Larry Jones
- Jul 15
- 2 min read
Updated: Jul 16
If you’ve ever heard a business owner say, “We’re an S corp now” and wondered what on earth that means (and if it’s something you should know about), today’s financial word has your back.
Definition of S Corporation
An S Corporation—or S corp for short—is a special type of corporation that allows business owners to enjoy the legal protections of a corporation while avoiding the dreaded “double taxation” that typically comes with one.
Here’s the deal: a regular corporation (called a C corporation) pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive. That’s double taxation—profits taxed at the corporate level and then again at the personal level.
An S corp dodges this by passing corporate income, losses, deductions, and credits straight through to shareholders’ personal tax returns. In other words, the S doesn’t stand for “Superman,” but it does save you from a kryptonite-level tax hit.
Why do people choose an S corp?
The two big reasons:
Tax savings – You avoid corporate taxes. Profits are only taxed once at the individual level.
Liability protection – Just like a C corp, it shields your personal assets from business debts and lawsuits.
But it’s not all sunshine and tax breaks. The IRS limits S corps to:
100 shareholders max
Shareholders who are U.S. citizens or residents
Only one class of stock
Certain types of businesses (no banks or insurance companies, for example)
Real-World Example
Imagine Jill runs a graphic design business making $200,000 a year. She could stay a sole proprietor and pay self-employment taxes on all of it, or form an LLC taxed as an S corp. With the S corp, she pays herself a “reasonable salary” of $100,000 (subject to payroll taxes), and the other $100,000 is distributed as dividends—avoiding self-employment taxes on that portion. Result? Thousands saved in taxes.
But—and this is important—the IRS loves to audit S corps that get greedy with “unreasonably low” salaries. So don’t play games with it.
Quick Takeaway
An S corporation might be a powerful tax and liability tool for small business owners. But it isn’t for everyone. There are rules, paperwork (you’ll need IRS Form 2553 to elect S corp status), and ongoing requirements like holding shareholder meetings and keeping corporate minutes.
Think of it like upgrading your business structure from a basic sedan to a luxury SUV. More features, more protection—but also more maintenance.
Speak the Language of Money Tip
If you’re a business owner (or thinking about starting one), talk to a CPA about whether an S corp makes sense for you. It could save you thousands—or create headaches if done wrong.
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