S Corporation

An S Corporation isn't actually a type of business entity — it's a tax election you make with the IRS by filing Form 2553. You can elect S-Corp status whether you're organized as an LLC or a corporation. The key benefit is how it changes the way you pay taxes on your business income.

Without S-Corp status, all your business profit is subject to self-employment tax (15.3%). With an S-Corp election, you split your income into two buckets: a reasonable salary (subject to payroll taxes) and distributions (which avoid self-employment tax entirely).

For example, if your business earns $200,000 in profit and you set a reasonable salary of $80,000, you only pay payroll taxes on the $80,000. The remaining $120,000 comes to you as a distribution, free of the 15.3% self-employment tax. That's a savings of roughly $18,360 per year.

S-Corps do come with additional requirements: you must run payroll, file a separate tax return (Form 1120-S), and maintain corporate formalities. Most business owners find it worthwhile once their net income consistently exceeds $60,000-$80,000 annually.

The IRS requires that S-Corp owners pay themselves a "reasonable salary" before taking distributions. Setting this too low is one of the most common audit triggers for S-Corps.