S Election is a tax status chosen by certain small corporations in the United States, allowing them to pass income and losses directly to their shareholders and avoid double taxation at the corporate and individual levels.
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Last Updated: February 17, 2026
Choosing the right business structure is a typical challenge for small business owners. This page will explain what business owners need to know about an S election, including what it is, its benefits, and how this election is made.
S election, also called S corporation status, is a tax status for businesses. Business owners often opt to organize as a limited liability company or corporation in order to have limited personal liability for their company’s obligations. Electing S corporation status (or choosing not to do so) will affect how the business owners pay taxes.
A C corporation pays federal income taxes at the entity level, while shareholders pay taxes on the dividends and salaries they receive from the corporation. Often, this is called corporate “double taxation.” In contrast, an LLC uses pass-through taxation, which is where the LLC pays no taxes at the entity level. Instead, taxes are “passed on” to the owners, who pay income taxes on any profits.
An S election allows a corporation to use pass-through taxation. Plus, unlike the LLC, an S Corp can save owners money by allowing them to use a bifurcated tax rate. The S election means the owners will pay the individual income tax rate on their salary and a lower rate on capital distributions.
By definition, the S election doesn’t create a separate business structure; it just changes its tax classification with the IRS. Some states automatically recognize the federal S election. Other states require businesses to file a state-level S election, while others don’t recognize S Corps at the state level.
One of the main advantages of the S election is that business owners may end up owing less tax. Primarily, the S election means that the business won’t pay income taxes at the entity level. Secondly, the S election allows the owners to pay a potentially lower tax rate on distributions, provided their tax bracket’s effective tax rate is lower than the current corporate tax rate: 21%.
Additionally, electing S corporation status might reduce the business owners’ self-employment tax burden. Determining whether this is the case can be a bit tricky, so it’s prudent for business owners to consult a tax professional before making an S election.
The S election has disadvantages, too. First, making the S election requires additional paperwork. Some states require LLCs to make corporate filings after making the S election.
Another important consideration is that not every company can make the S election. The IRS has specific requirements or limits, including:
Also, it’s important to know what impact the S election will have on the company’s state taxes. Consider these S election examples.
In most states, the business owner might be able to pay a lower tax rate on distributions at both the federal and state levels. If an entrepreneur’s state doesn’t recognize the S election, then those potential tax breaks might be lower. However, some states don’t have a state-level income tax, so the lack of S Corp status in that state won’t affect what you owe.
The S election offers a lower tax rate on distributions and no income taxes at the corporate level.
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Taxes aren’t fun, but they’re an unavoidable part of business. Thankfully, entrepreneurs don’t have to navigate the business world alone. ZenBusiness can help. They offer Business Formation Plans that make it easy to get an LLC or corporation up and running (and they can help with S corporation election if the business isn’t formed yet). ZenBusiness also offers a Worry-Free Compliance Service that makes it easier to keep a company compliant in the long term.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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