S-Corporation

An S-Corporation is a business entity that has elected pass-through tax treatment under Subchapter S of the Internal Revenue Code by filing IRS Form 2553, allowing business income, losses, deductions, and credits to flow through to shareholders' individual tax returns — avoiding the double taxation inherent in C-Corporation structures. To qualify, an S-Corporation must have no more than 100 shareholders, all of whom must be U.S. citizens or resident aliens (trusts and estates qualify under certain conditions, but partnerships, corporations, and non-resident aliens do not), and it may issue only one class of stock. The primary financial advantage for owner-operators is the reduction of self-employment tax: while all net income from a sole proprietorship or single-member LLC is subject to the full 15.3% FICA/Medicare tax (on the first $168,600 of earnings in 2026, plus 2.9% Medicare on amounts above), S-Corporation shareholders pay FICA only on their reasonable salary — with remaining distributions exempt from self-employment tax. For a business with $200,000 in net income paying the owner a $90,000 reasonable salary, the annual self-employment tax savings on the $110,000 in distributions can exceed $16,830. However, the IRS closely scrutinizes reasonable compensation, and paying below-market salaries risks reclassification of distributions as wages plus penalties. S-Corporations file Form 1120-S annually and issue Schedule K-1s to each shareholder. doola provides full-service S-Corporation formation and maintenance including Form 2553 filing, payroll setup, reasonable compensation benchmarking, quarterly estimated tax calculations, and annual Form 1120-S preparation.