What Is an S Corporation (S Corp)?

By Rachel Warren – Updated Apr 4, 2025 at 10:35 PM

Key Points

S corporations pass profits and losses directly to shareholders, avoiding double taxation.
Owners can reduce self-employment tax by splitting income into salary and distributions.
S corporations can continue operations despite changes in ownership, aiding succession planning.

S corporations are common among small to medium-sized businesses, including family-owned businesses, professional services firms, and retail stores. S corporations are considered "pass-through entities," meaning their profits and losses are passed directly to the shareholders' personal tax returns. The structure helps avoid the double taxation that can occur with traditional C corporations when the company and shareholders are taxed separately.

Loading paragraph...

Two women working at a clothing retailer — Image source: Getty Images.

Loading image...

S corporations can be attractive to investors due to their potential for tax savings, limited liability protection, and the ability to pass through profits and losses, which can also be beneficial for certain investment strategies.

Loading paragraph...

Loading pitch...

Loading paragraph...

Loading pitch...

S corporations can deduct business expenses, like salaries, wages, rent, utilities, and supplies, reducing taxable income and tax liability. Shareholders can deduct business losses on their personal tax returns, up to their basis in the stock and any loans made to the entity. These entities are not subject to the accumulated earnings tax, which can be a concern for C corporations.

S corporation ownership interests can typically be transferred without major tax consequences or legal complexities. These structures have a perpetual existence, meaning they can continue to operate even if ownership changes, which can be advantageous for succession planning. This status can also help establish credibility with potential customers, employees, suppliers, and investors.

Loading paragraph...

Related investing topics

Loading paragraph...

Best Small-Cap Stocks to Buy in 2025

The smaller companies in the stock market might make for big returns.

Investing in Mid-Cap Stocks

These not-too-big, not-too-small companies may be just right for your portfolio.

Loading hub_pages...

Loading paragraph...

Loading pitch...

About the Author

Rachel Warren is a contributing Motley Fool stock market analyst covering pharmaceuticals, biotechnology, medical devices, information technology, and consumer goods. Prior to The Motley Fool, Rachel was a paralegal and legal administrator. She holds a bachelor’s degree in paralegal studies from Liberty University School of Law.

TMFRachelW

The Motley Fool has a disclosure policy.