A U.S. corporation that has elected to be taxed as a pass-through entity, allowing profits and losses to flow directly to shareholders, avoiding double taxation at the federal level.
What is an S Corporation?
An S Corporation (or S-Corp) is a tax classification available to certain U.S. corporations that allows them to be taxed as pass-through entities. Unlike a traditional C Corporation, which pays federal income tax at the corporate level, an S-Corp’s profits and losses are passed directly to its shareholders and reported on their personal tax returns—helping avoid double taxation.
To be treated as an S Corporation, a company must:
- Be a domestic U.S. corporation
- Have 100 or fewer shareholders
- Have only eligible shareholders (must be U.S. citizens or resident individuals—non-U.S. persons cannot be shareholders)
- Have only one class of stock
- File IRS Form 2553 to elect S-Corp status
Because of this shareholder restriction, S-Corps are not typically an option for non-U.S. founders, unless the ownership is structured entirely through eligible U.S. residents or citizens. That said, it’s important for international founders to understand S-Corps, especially when reviewing tax options, setting up subsidiaries, or working with U.S.-based co-founders.
From a legal standpoint, an S-Corp is identical to a C Corporation: it must be incorporated at the state level, maintain corporate formalities (such as a board of directors and officers), and follow record-keeping and reporting requirements. The distinction lies solely in how it is taxed.
Benefits of S-Corp taxation include:
- Pass-through taxation, avoiding federal corporate income tax
- Potential to save on self-employment taxes, since reasonable salaries are subject to payroll tax but distributions (dividends) are not
- Credibility and structure of a corporation, appealing to partners or banks
Limitations include:
- Eligibility restrictions on shareholders
- Increased IRS scrutiny of reasonable compensation for shareholder-employees
- Potential state-level taxes or fees (some states don’t recognize S-Corp status)
S-Corps are commonly used by small U.S.-based businesses with U.S. owners who want to benefit from pass-through taxation while maintaining a formal corporate structure. They are not suitable for most foreign-owned companies due to IRS ownership restrictions.In summary, an S Corporation is a tax-efficient alternative to the standard C Corporation—but only for eligible U.S.-based shareholders. It offers pass-through taxation and potential payroll tax savings, but comes with strict requirements and is generally not available to non-U.S. residents. Understanding the difference helps non-U.S. founders choose appropriate entity structures for U.S. operations.
