S Corp Requirements: Filing Guide For Business Owners

Want to protect your personal assets and save on taxes? An S corporation (also shortened to S corp) lets you do both. This special tax status combines the legal protection of a traditional corporation with corporate tax savings—which is why it’s now the most common corporation type in the US, according to the IRS.

While millions of business owners choose to operate as S corps, getting and keeping this tax status takes some planning. You’ll need to stay on top of IRS requirements and deadlines. Missing even one can trigger penalties or cost you your S corporation status, creating major tax headaches for your business and shareholders.

This guide walks you through everything you need to know about S corps—from the key criteria and steps to set up and maintain S corp status successfully, to practical tips for avoiding common pitfalls.

What is an S corporation (S corp)?

An S corporation—or S corp for short—is a special federal tax designation that helps you avoid corporate taxes. Instead of your business paying tax directly, all profits and losses pass through to your personal tax return.

This means you won’t face double taxation like you would with a regular corporation, where profits get taxed twice—once at the corporate level and again on your personal return. You’ll also keep your personal assets protected if your business runs into debt or legal issues. 

The “S” comes from Subchapter S of the Internal Revenue Code. While other business structures like LLCs can choose to be taxed as S corps, you’ll need to meet specific IRS requirements and file the right paperwork first. 

Filing requirements for an S corp

To qualify for S corp status, you’ll need to meet these IRS requirements:

• Be a domestic corporation
• Have only allowable shareholders (like individuals, certain trusts, and estates)
• Stay under the 100 shareholder limit
• Issue only one class of stock
• Not be an ineligible corporation type

To start an S corp, you’ll need to establish your business as a corporation by filing articles of incorporation with your state’s governing authority and paying the filing fee. Requirements vary by state, so check your relevant Secretary of State website for more info.

Next, all shareholders must sign Form 2553 (Election by a Small Business Corporation) and submit it to the IRS. Timing matters here—file your form no later than two months and 15 days into the tax year for your S corp status to take effect. If you file late, you might need to wait until next tax year.

Let’s look at each of the key requirements in detail:

Domestic corporation status

Your S corporation must be based in the US. You can only create it in a US state, Washington, DC, or one of the five US territories.

Eligible shareholders

Only US citizens and permanent residents can be shareholders in your S corporation—non–resident aliens don’t qualify. Partnerships and corporations can’t own an S corp either.

However, these entities can be shareholders:

• Certain types of trusts (grantor, testamentary, QSST, and ESBT)
• Some tax-exempt organizations like nonprofits

Shareholder limits

Your S corporation can’t have more than 100 shareholders. However, a family (and their estates) counts as a single shareholder for this requirement. 

Stock requirements 

Your company can have only one type of stock. While voting rights can vary, all shares must pay out profits the same way.

Business type restrictions

Some businesses can’t qualify for S corp status, including: 

• Insurance companies
• Certain financial institutions
• Domestic international sales corporations (US exporters with special tax treatment)

State requirements

Beyond federal rules, your corporation needs to follow state-specific requirements both where you incorporate and in other states where you do business.

Some states automatically recognize your federal S corporation election, while others don’t. For example, if you operate in Arkansas or Louisiana, you might need to file a separate state-specific election. You may also face additional state taxes depending on where you operate. 

Taxes for S corps

S corps are different from C corps in that they’re not subject to double taxation. Instead of paying corporate income tax, your business passes its tax obligations through to shareholders, who then pay taxes at their personal income rates.

However, your S corp still needs to pay certain taxes:

Business taxes

• Estimated tax: If you expect to owe $500 or more when filing your income tax return (use IRS Form 1120-W).
• Employment tax: Social Security, Medicare, and federal unemployment (FUTA) tax (use Forms 941 and 940).
• Excise tax: Applied to specific goods, services, and business activities. Each excise tax will have its own form to file with the IRS. Check with your accountant to see if excise tax applies.
• State and local income tax: Some locations, like California and New York City, tax S corps on net income. 
• Federal reporting: File Form 1120-S to report your net profits, losses, and deductions.

Shareholder taxes

Your S corp’s shareholders need to pay:

• Estimated tax: If they expect to owe $1,000 or more when personal returns (use Form 1040-ES)
• Income tax: Federal and state income taxes on their share of business profits (using forms 1040 or 1040-SR)

Advantages of filing as an S corp

Filing as an S corporation offers a number of advantages for your business, mainly around protecting your assets and saving on taxes.

Protection for your personal assets

If your company faces lawsuits or declares bankruptcy, personal assets stay protected from creditors and legal claims.

No double taxation

Since S corps are pass-through entities, your business profits and losses flow through to shareholders, who pay taxes at their personal rates. Unlike C corporations, which get taxed twice—once on corporate income and again at the shareholder level—you’ll likely reduce your overall tax burden.

Tax savings for owners

As an S corp owner, you won’t pay self-employment taxes on distributions from business profits—unlike sole proprietors, general partnerships, or LLC owners.

Just note that if you work in the business, you must pay yourself a “reasonable salary” as defined by the IRS. You can’t avoid employment taxes by taking a very low salary and higher dividends.

Simpler compliance

While you’ll need to follow specific IRS rules to keep your S corp status, the requirements are simpler than those for C corporations. Instead of filing separate corporate and individual tax returns, owners report their share of business income using a Schedule K-1 form. 

You’ll still need to hold annual meetings and maintain corporate records, but you’ll face fewer IRS regulations overall compared to other business structures.

Not sure if an S corp is right for your business? Compare it to other types of corporations:

• LLC vs. S Corp: Choosing the Best Option for You
• Sole Proprietorship vs. S Corp: A Guide to the Differences
• S Corp vs. C Corp: The Key Differences to Consider

Disadvantages of filing as an S corp

While S corps offer many benefits, they also come with some disadvantages, especially around shareholding and fundraising.

Limits on raising capital

You can only issue shares to a maximum of 100 shareholders, and they must be US citizens or resident aliens. You cannot sell shares to corporate entities, which can restrict your fundraising options.

Complex tax considerations

If you’re a shareholder or employee who owns more than 2% of the S corp’s shares, you can’t receive corporate health benefits as a tax-free distribution. Also, since taxes are paid at personal rates, high-income shareholders might pay more on dividends.

Strict compliance requirements

Missing IRS requirements can have serious consequences. The IRS can revoke your S corp status, charge back taxes for three years, and make you wait five years before reapplying. Common violations include: 

• Issuing stock to a forbidden class, such as non-resident alien shareholders
• Having passive income exceed 25% of gross receipts for three consecutive tax years

Start building your S corp today with Shopify

S corps balance the liability protection of traditional C corps with the tax advantages of pass-through entities. While this structure works well for many small businesses focused on saving money, the limits on stock issuance might not suit companies planning aggressive growth. 

Take time to review your long-term business plans before choosing the right type of corporation for you. No matter which structure you choose, Shopify provides the tools and support you need to succeed. Join millions of entrepreneurs who trust Shopify to power their businesses.