Entities
S-Corporation
Also known as S-Corp
An S-Corporation is a US tax election, not a separate entity type. An LLC or corporation that elects S-Corp status passes profit through to its owners while allowing part of that profit to be taken as a distribution rather than salary, reducing self-employment tax. Shareholders must be US persons.
In plain terms: A tax election that can cut self-employment tax on a profitable company — but only if you are a US person.
Why it matters
The saving comes from splitting income: you pay yourself a reasonable salary, which carries employment taxes, and take the remainder as a distribution, which does not. It is worth considering once profit meaningfully exceeds a reasonable salary for the work, because the election adds payroll filings and accounting cost.
Example
A consultancy earns $150,000. The owner takes a $70,000 salary and $80,000 as distributions. Self-employment tax applies to the salary portion, not the distributions.
Common misunderstanding
That non-residents can use it. S-Corporation shareholders must be US citizens or residents, so this election is unavailable to most international founders.
Read the full guideUS business taxesRelated terms
Source: IRS — S Corporations. This is a definition, not tax or legal advice — verify against the primary source before acting.