Should You Elect an S-Corp? Key Considerations and Trade-offs for Small Business Owners

If you’re a small business owner, freelancer, or considering starting one, you’ve may have heard about S-Corps often as a path to tax saving. But is it right for you? Electing S-Corp status can offer significant financial benefits—but it’s not for everyone. In this post, we’ll break down who should consider becoming an S-Corp, and the trade-offs to keep in mind. First, What’s an S-Corp?

An S-Corporation isn’t a business entity type like an LLC or C-Corp—it’s a tax classification. Both LLCs and corporations can elect to be taxed as S-Corps by filing IRS Form 2553, as long as they meet certain criteria (like having fewer than 100 shareholders, all of whom are U.S. citizens or residents).

The big draw? Potential tax savings through what’s known as “pass-through taxation.” Read more here.

S-Corp can carry significant tax benefits particularly for independent professionals and small business owners. An S-Corp is a tax status which can provide meaningful tax savingins particulary for those with business income between $70,000 and $400,000 .

One of the key benefits of an S-Corp is the potential tax savings it can provide related to self employment tax. As an S-Corp owner, you can pay yourself a reasonable salary and then take the rest of your income as distributions, which are not subject to self-employment tax. This can result in significant tax savings compared to being a sole proprietor or a member of a partnership. In addition to tax savings, forming an S-Corp can also offer liability protection for your personal assets. If your business were to face legal issues, your personal assets would generally be protected from any claims against the company. Furthermore, having an S-Corp can lend credibility to your business and may make it easier for you to attract investors or secure financing in the future. It can also provide more flexibility in structuring employee benefits and retirement plans. If you're considering forming an S-Corp, it's important to follow all compliance requirements to maintain your status. This includes holding annual shareholder meetings, keeping accurate financial records, and filing the necessary paperwork with the appropriate government agencies. At S Works, we provide a range of services to help independent white-collar professionals make the most of their S-Corp status. From incorporation to bookkeeping, payroll, and tax services, we offer an end-to-end back office solution to simplify the process for you. Whether you're just starting out or looking to optimize your current business structure, forming an S-Corp could be a smart move to maximize your tax benefits and protect your personal assets. Stay tuned for more information on how S Works can help you achieve your financial goals as an independent professional.