An S Corporation is not a business entity.
It is a tax election made with the IRS.

What an S Corporation Actually Is

An S Corporation (S-Corp) is a federal tax classification under Subchapter S of the Internal Revenue Code.

It is not:

  • A legal entity type

  • A business structure you form with the Secretary of State

  • A separate type of LLC

What It Really Means

You first form a legal entity:

  • LLC (Limited Liability Company)

  • Corporation (Inc.)

Then, that entity can elect to be taxed as an S Corporation by filing IRS Form 2553.

Once approved, the IRS taxes the business under S-Corp rules.

Why People Choose the S-Corp Election

The main reason is tax strategy, specifically:

  • Reducing self-employment taxes

  • Splitting income between:

    • Reasonable salary (W-2 payroll)

    • Distributions (not subject to SE tax)

How It Works in Simple Terms

Without S-Corp election:

  • An LLC is taxed by default as a sole proprietorship (single member) or partnership (multi-member).

  • All net profit is subject to self-employment tax (15.3%).

With S-Corp election:

  • Owner must run payroll and pay themselves a reasonable salary.

  • Remaining profit can be taken as distributions, which are not subject to self-employment tax.

You still pay:

  • Income tax on all profit

  • Payroll taxes on salary

  • But you potentially reduce SE tax exposure

Key Takeaway

An S Corporation is:

A tax election that an LLC or corporation adopts for federal tax purposes.

It changes how the business is taxed, not what the business legally is.