Careers Business Ownership Questions and Answers About Electing S Corporation Status Share PINTEREST Email Print Business Ownership Operations & Success Business Law & Taxes Sustainable Businesses Supply Chain Management Operations & Technology Marketing Market Research Business Insurance Business Finance Accounting Industries Becoming an Owner By Jean Murray Jean Murray Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years. Learn about our Editorial Process Updated on 11/20/19 The S corporation is a popular business type, but it's often misunderstood. Some say that it's overused as a protection against liability. The S corporation does have both benefits and drawbacks, but it's useful for small businesses that want to protect their owners from liability and enjoy the benefits of pass-through taxes. 01 of 09 What Is an S Corporation? Maskot / Getty Images A Subchapter S corporation is a corporation whose profits and losses are taxed to its owners on their individual income tax returns instead of to the corporation. Subchapter S status must be elected by the corporation after it's chartered. This allows a corporation to combine the limited liability benefits of a corporation with the tax benefits of taxation at the personal tax rate. 02 of 09 What Are the Eligibility Requirements for an S Corporation? Only certain types of corporations are eligible to elect S corporation status. Requirements include a limited number of shareholders and restrict shareholders to only U.S. citizens. They allow only certain types of entities. 03 of 09 What Is the Benefit of Electing S Corporation Status? The benefits of becoming an S corporation include lower taxes—both income tax and self-employment tax. The pass-through nature of an S corp allows its owners to reduce their total tax bill or pay at a lower rate than the corporation itself would pay. 04 of 09 What Are the Drawbacks to Electing S Corporation Status? The disadvantage of S corp status is the same as that for other corporations—the complexity of requirements and paperwork needed to maintain this status. Forming an LLC doesn't require this same level of detail. For example, a corporation must, by law, have annual meetings but there's no such requirement for an LLC. 05 of 09 What Is the Difference Between a Corporation and an S Corporation? The S corp is a type of corporation, but it's taxed differently from a corporation. A corporation pays income tax as a separate entity while an S corp pays income tax through the tax returns of its owners according to their percentage share of ownership. 06 of 09 What Is the Difference Between an S Corp and an LLC? S corporations and limited liability companies both have limited liability and both have pass-through taxes that are passed to the owners/members. But there are differences in payment to owners/members, as well as in taxes and other key areas. 07 of 09 How Does a Business Become an S Corporation? A business becomes an S corporation in two steps: First, the business becomes a corporation by filing Articles of Incorporation with the state.Then the corporation elects S corporation status with the Internal Revenue Service. The election should be made within a specific period of time after incorporation, but it can also be made in any year for the following year. 08 of 09 How Does an S Corporation Pay Income Tax? An S corporation files a tax return for the corporation on Form 1120-S after the corporation's income and expenses, dividends, and other items are distributed to shareholders through Schedule K-1. 09 of 09 What Information Do I Need to File Income Taxes for an S Corporation? You'll need a profit and loss statement for the year and balance sheets for the beginning and end of the year to file an S corp income tax return. You'll also need details on corporate officer compensation, cost of goods sold, and asset records for depreciation calculations. An S Corp Is a Hybrid The best way to look at an S corporation is as a hybrid. It's a corporation for legal and liability purposes, and it's a partnership for tax purposes. The S corporation provides liability protection for its owners because it is, in fact, a corporation, and it's, therefore, a separate entity from the owners. But the profits of the S corporation are distributed to and taxed to the owners in the same way as the partners in a partnership.