ContractsCounsel Logo
Home Blog S Corporation: Advantages and Disadvantages, How They Work

S Corporation: Advantages and Disadvantages, How They Work

Jump to Section

What is an S Corporation?

An S Corporation is one type of legal entity that can be established to operate a business. When a business owner chooses to incorporate their company as an S Corporation, their business must meet specific IRS requirements.

These requirements include:

  • No more than 100 principal shareholders or owners
  • Owners must be US citizens or permanent residents
  • The company cannot be owned by any other corporate entity including other S Corps, C Corps, LLCs, business partnerships, or sole proprietorships
  • Required board of directors, this is common but not required by the IRS. The IRS only requires an S Corp to have officers, such as president, secretary, and treasurer.
  • Required annual meetings
  • Strict regulations on corporate bylaws
  • Strict regulations on issuing stock shares

Forming an S Corporation is similar to forming any other business. Depending on your state business laws, to start your S corporation, you will need to complete the following steps.

  1. Business Name: Your business needs a unique name that does not infringe on any registered trademarks.
  2. Appoint a Board of Directors: The IRS mandates that to be an S Corporation, there must be a board of directors. The board of directors is your business’s governing body. The IRS also requires that the board hold regularly scheduled meetings and keep minutes for these meetings.
  3. File Articles of Incorporation: Corporate articles of incorporation must be filed with both the IRS and the Secretary of State. This allows your company to be recognized as a legally operating corporation.
  4. Write and File Corporate Bylaws: Corporate bylaws are mandated by the IRS for a corporation to be classified as an S Corp. Bylaws will outline the process for electing and removing directors from the board, how stock is sold and distributed, when meetings will be held, voting rights, and how the death of a director will be handled.
  5. Issuance of Stock to Shareholders: Once the corporate bylaws establish how stock will be distributed, a corporation can issue stock to the company’s shareholders. S Corps can be in the form of either common stock or preferred stock. However, it can only have one class of stock. This means that all shareholders must have the same rights and privileges with respect to voting and distribution of profits.

For more information about S Corporations and business formation, click here.

Advantages of S Corporations

S Corporations provide several advantages to shareholders, most notably in the areas of liability protection and taxes.

S Corps are separate legal entities from the company’s shareholders so shareholders benefit from liability protection. If there is a lawsuit against the company or the company is facing collection from creditors, the personal assets of shareholders are protected.

Forming an S Corporation provides the shareholders with many tax benefits. S Corps are a pass-through entity. Pass-through taxation allows the profits and losses from a company to pass through to the owners. This avoids paying federal taxes at the corporate level.

Some other advantages include:

  • Shareholders can be considered employees and draw an employee salary from the business
  • Shareholders can receive dividends and other tax-free distributions
  • The ability to transfer interests or adjust property basis without facing tax consequences
  • Establishing an S Corporation gives your business credibility that it may not gain under a sole proprietorship or an LLC

If you are unsure that an S Corporation is the right business structure for your company, read this article to learn about other business entity options.

Meet some lawyers on our platform

Ryenne S.

632 projects on CC
CC verified
View Profile

Daehoon P.

199 projects on CC
CC verified
View Profile

Brian W.

10 projects on CC
CC verified
View Profile

Kelvin R.

24 projects on CC
CC verified
View Profile

How Are S Corporations Taxed?

S Corps are pass-through entities. That means the corporation is not subject to federal income tax like a C Corporation. Much like a partnership or a multi-member LLC, shareholders of an S Corp are taxed based on their allocated share of income.

Shareholders are required to report all financial information relating to the business on their individual tax returns and pay taxes at their regular income rates. This allows shareholders to avoid the double taxation usually associated with a corporation.

Several forms need to be filed with the IRS for S Corps taxes. The first form is Form 2553 which is the “Election by a Small Business Corporation” form. This form proves that the business meets all the requirements set forth by the IRS to be an S Corp.

For state taxes, every state has its own laws and regulations regarding S Corp taxation. Some states have rules like the federal government in which the corporation is not taxed, while other states require S Corps to pay a state income tax.

S Corporation vs. LLC

S Corp and LLC Similarities:

  • An S Corporation and an LLC both offer liability protection to the business owners and shareholders. Both business entities are legally separate from the owner or shareholders. In the event of a lawsuit or a creditor collection, the owner’s personal assets are protected from business risks and debts.
  • S Corps and LLCs are both pass-through entities. Neither business pays corporate taxes and both entities require that the owner or shareholders report earnings and losses on their personal tax return avoiding corporate double taxation.

S Corp and LLC Differences:

  • LLCs are simpler to set up and less expensive to maintain. They are not subject to strict IRS guidelines and are not required by law to have a board of directors, bylaws, or meetings.
  • S Corporations provide better opportunities for securing outside financing. Unlike an LLC, S Corps have shareholders and can issue stock to investors.
  • An LLC can be dissolved if a member or an owner withdraws from the business. An S Corp tends to have perpetual existence.
  • LLCs provide more flexibility for owners and allow owners to maintain more control over their business

Choosing which entity to form for your business will depend on your individual business needs. A business run by a single owner who wants to maintain full control of their company and have flexibility should choose an LLC.

If there are several owners involved in a business and the business will be seeking investors for additional funds, then an S Corp formation would be more beneficial.

For more information about LLCs, click here.

S Corporation vs. C Corp

S Corp and C Corp Similarities:

  • S Corporations and C Corporations are both incorporated business entities governed by federal and state corporation laws.
  • Both corporation structures offer liability protection to the owners
  • S Corps and C Corps are required to have a board of directors, corporate bylaws, and hold regularly scheduled shareholders meetings

S Corp and C Corp Differences:

  • C Corps are subject to federal corporate taxes at a rate set by the federal government. C Corps are required to pay taxes on 21% of their income and then shareholders will also pay tax on the dividends they receive. This is usually referred to as “double taxation”.
  • S Corps are exempt from corporate taxes so shareholders will only pay taxes on income once, on their personal tax returns.
  • C Corps benefit from several tax advantages like deductions of charitable contributions from their earnings and the availability of untaxed benefits for employees.
  • S Corps are strictly regulated by the IRS, so C Corps offer more flexibility and ownership options than an S Corp.
  • Shareholders of a C Corp do not have to be US citizens or permanent residents.
  • C Corps have more options for classes of stock.
  • C Corps have fewer restrictions when it comes to raising funds.

If you are planning to incorporate your business and still are not sure about which structure to choose, seeking the advice of a corporate lawyer could be helpful.

Get Help Creating an S Corporation

Do you have questions about forming an S Corp and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from corporate lawyers who specialize in S Corp formation.


ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


Need to form an S Corporation?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews

Meet some of our Lawyers

Steven S. on ContractsCounsel
View Steven
5.0 (15)
Member Since:
April 7, 2023

Steven S.

Attorney
Free Consultation
New York; Florida
43 Yrs Experience
Licensed in FL, NY
New York Law School

Steven Stark has more than 35 years of experience in business and commercial law representing start-ups as well as large and small companies spanning a wide variety of industries. Steven has provided winning strategies, valuable advice, and highly effective counsel on legal issues in the areas of Business Entity Formation and Organization, Drafting Key Business Contracts, Trademark and Copyright Registration, Independent Contractor Relationships, and Website Compliance, including Terms and Privacy Policies. Steven has also served as General Counsel for companies providing software development, financial services, digital marketing, and eCommerce platforms. Steven’s tactical business and client focused approach to drafting contracts, polices and corporate documents results in favorable outcomes at a fraction of the typical legal cost to his clients. Steven received his Juris Doctor degree at New York Law School and his Bachelor of Business Administration degree at Hofstra University.

Richard M. on ContractsCounsel
View Richard
5.0 (1)
Member Since:
January 19, 2024

Richard M.

Tax Attorney
Free Consultation
San Diego, California
25 Yrs Experience
Licensed in CA
UCLA School of Law

Richard A. Mathurin is as a member of the professional team at Sage Law. Since graduating cum Laude from The University of Notre Dame and UCLA School of Law, Rich has enjoyed an exciting and diversified career in the practice of law. In his early career, he assisted several energy companies all over the world in the development and funding of major wind energy and other green technology projects. Following an assignment by his firm to their Far East offices in Tokyo and Singapore, Rich represented global corporations such as Hitachi, UPS, and Fuji-Xerox in major commercial transactions. More recently, Rich returned to his native San Diego to care for an ill family member and work in the local community. Rich specializes in tax resolution, bankruptcy and small business services helping clients get in compliance with complex tax laws and manage their personal and business finances. When he is not working servicing his valued clients, Rich is an ardent golfer and enjoys rooting for his favorite Boston sports teams.

Mark P. on ContractsCounsel
View Mark
5.0 (8)
Member Since:
July 21, 2023

Mark P.

Owner
Free Consultation
Kansas City, MO
9 Yrs Experience
Licensed in KS, MO, NE, TX
University of Missouri - Kansas City

www.parachinilaw.com I represent a diverse mix in a vast array of specialties, including litigation, contracts, compliance, business and financial strategies, and emerging industries. Credit for this foundation of strength goes to those who taught me. Skilled professors and professionals fostered my powerful educational and professional background. Prior to law school, I earned dual Bachelor’s degrees in Business Administration & Accounting from Peru State College. I received a Master of Business Administration degree from Chadron State College. My ambitions did not stop there. While working full time as a Senior Accountant for the University of Missouri, Columbia, I achieved the lifelong goal of becoming a licensed Certified Public Accountant (CPA). Mizzo provided excellent opportunities and amazing experiences. Managing over $50M in government and private research funding was a gift. As a high ranking professional in the Department of Research, I was given priceless insight into the greatest scientific, journalistic, medical, and legal minds in the world. My passion for successful growth did not, and has not stopped. I graduated summa cum laude (top 3%) with a Doctorate in Law, emphasizing in urban, land use and environmental/toxic tort law from the University of Missouri, Kansas City. This success lead to invaluable experiences of serving as Hon. Brian C. Wimes' judicial clerk for the U.S. District Court for the W. D. of Missouri, as a staff editor/writer for UMKC Law Review, and as a litigation and transactional attorney with Lathrop GPM (fka Lathrop & Gage). My professional and personal network is expansive, with established relationships throughout the U.S. and overseas. Although I engage in legal practice all over the country, I maintain law licenses in Missouri, Kansas, and Nebraska. Federally, I hold licenses in the W.D. and E.D. of Missouri and the District of Nebraska. To offer extra value, efficiency, and options, I maintain a CPA license and am obtaining a real-estate brokerage license.

Jimmy V. on ContractsCounsel
View Jimmy
5.0 (14)
Member Since:
February 10, 2023

Jimmy V.

Attorney
Free Consultation
Dallas, Texas
43 Yrs Experience
Licensed in TX
University os San Diego

I’m a semi-retired, long-time US attorney with substantial experience in business and corporate law. I counsel startups and small businesses, help them set up corporations or LLCs across the country and draft a variety of contracts and corporate documents.

Robert M. on ContractsCounsel
View Robert
5.0 (3)
Member Since:
February 14, 2023

Robert M.

Attorney
Free Consultation
Nashville
3 Yrs Experience
Licensed in TN
Nashville School of Law

Robert is a sixth-generation Tennessean and part of a long line of Tennessee attorneys: There has been a Marks attorney in Tennessee since 1856. In 1929, Robert’s great-grandfather established an event venue, Shadowbrook, which Robert has worked at his entire life, including managing for 10 years. He knows what business owners are dealing with—especially venue owners—because he has dealt with it. While Robert loves the hospitality industry, he pursued his passion. In 2016, Robert decided to attend law school and continue managing the business. He thrived. He was a founding member of the Nashville School of Law's Legal Aid Society, received the Tennessee Supreme Court’s Law Student for Justice award, and interned with the Tennessee Supreme Court's Access to Justice Commission. Before co-founding Mercury Legal Group, Robert focused on estate planning in solo practice. In this role, he helped clients protect what they had spent a lifetime building. Now he helps his clients build their businesses by providing tailored legal services.

Kandil O. on ContractsCounsel
View Kandil
Member Since:
February 9, 2023

Kandil O.

General Counsel
Free Consultation
Paris
10 Yrs Experience
Licensed in CA
ULH2 - master degree in business law

A business law practitioner by passion, I take pride in the perfection of my contracting Skills. Every piece of information I gather and spin together transforms to a legally binding document, providing great legal protection for start-ups and leading to eventual growth. I am a natural in law and entrepreneurship, making for a perfect blend.

Moxie M. on ContractsCounsel
View Moxie
Member Since:
February 11, 2023

Moxie M.

Employment Lawyer
Free Consultation
Los Angeles, CA
14 Yrs Experience
Licensed in CA, FL, OH
Stetson University College of Law

Lindsey has always been deeply invested in the power of knowledge; she was born and raised in Columbus, Ohio before making her way to Miami University for a dual Bachelor's degree. Afterward, Lindsey completed a Juris Doctor at Stetson University with an International Law concentration before earning a Health & Hospital law Certificate from Seton Hall School of Law. After graduating law school, Lindsey began her career as an associate at a Florida-based insurance litigation firm. She eventually transitioned to become a multi-year Rising Star in Employment Law by Super Lawyers as a labor and employment lawyer with Scott Wagner and Associates, supporting clients in Florida, California & Ohio with employment law matters. Her expertise covers counseling on workplace policies/handbooks; investigations into EEO discrimination/retaliation claims; wage disputes & wrongful terminations - equipping employees across multiple states for success in the ever-changing modern workforce landscape. Leveraging extensive knowledge of state/federal regulations gained from handling dozens of cases over many years, Lindsey has established herself as a leader in the field. Lindsey is a seasoned litigator, well-versed in the complexities of employer and employee disputes. She has represented clients on both sides during numerous mediations and provides an informed perspective when advocating for her clients' interests. She sharpened her dispute resolution skills by completing Harvard Law School's Negotiation Mediation course as part of their Executive Education Program as well as a Florida Circuit Civil Certified Mediator - making her qualified to mediate Circuit Civil cases in Florida as well as California and Ohio. Her breadth of knowledge provides valuable insight into the complexities each side faces while navigating their way through conflict mediation situations. With her varied expertise in the world of entertainment industry employment law, Lindsey has become a go-to source for Hollywood professionals, studios, and companies looking to make sure their legal considerations and entertainment contract law knowledge is up to date. From contract negotiations and employment advice to her outstanding knowledge of current regulations, she provides clients with everything they need for success both now and into the future. Lindsey dedicates her time and expertise to advancing the legal community. She proudly serves on the Executive Council for Florida Bar Association Labor and Employment Section, as well as with American Bar's Membership Outreach Committee in a leadership role. Lindsey is also an respected LA Magazine Editorial Board Member while Co-Chairing both LACBA CLE Event Dinner Committees - focusing on labor and employment law developments. Lindsey is passionate about providing accessible legal services to those in need. She serves on the Pro Bono Mediation Panel for the U.S Central District Court of California, volunteers as a mediator with California Lawyers for Arts and acts as Settlement Officer with Los Angeles Superior Court's ResolveLA program - all while donating her time towards resolving disputes through pro bono mediation at Equal Employment Opportunities Commission (EEOC). Lindsey is a globetrotter, an outdoor enthusiast, and dedicated sports fan all rolled into one. While splitting time between California, Florida and Ohio she has the best of three world - from hiking trails to family gatherings there's always something interesting on her horizon! Plus with photography as a hobby Lindsey enjoys capturing life’s precious moments so they can be treasured for years to come.

Find the best lawyer for your project

Browse Lawyers Now

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

View Trustpilot Review

Need to form an S Corporation?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews
CONTRACT LAWYERS BY TOP CITIES
See All Business Lawyers
S CORPORATION LAWYERS BY CITY
See All S Corporation: Advantages and Disadvantages, How They Work Lawyers

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

View Trustpilot Review

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

View Trustpilot Review

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

View Trustpilot Review

Need to form an S Corporation?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call

Find lawyers and attorneys by city