Should You Elect an S-Corp? Key Considerations and Trade-offs for new businesses

If you’re a small business owner, freelancer, or independent consultant, you’ve probably heard about S-Corps as a way to save on taxes. But is it right for you? Electing S-Corp status can offer serious financial benefits—but it’s not for everyone. In this post, we’ll break down who should consider becoming an S-Corp, and what 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.”

Why Elect S-Corp Status?

✅ Self-Employment Tax Savings

With an LLC taxed as a sole proprietorship, all profits are subject to self-employment tax (currently 15.3%). But an S-Corp allows you to split income into:

• Reasonable salary: taxed as ordinary income and subject to payroll taxes

• Distributions: taxed at your income rate, but not subject to self-employment tax

This can reduce your overall tax burden—sometimes significantly.

✅ Credibility and Structure

Electing S-Corp status may add a layer of legitimacy in the eyes of clients, investors, and partners. It also encourages better business hygiene: formal payroll, clean books, and clear boundaries between personal and business finances.

Who Should Consider S-Corp Status?

• Freelancers or consultants with $70,000+ in net profit

Tax savings increase as your profitability increases

• Service-based businesses with low overhead and high margins

The tax saving can be particularly high

• Solos looking to optimize taxes without adding too much complexity

S-Corps allow tax optimization with moderate effort

• LLC owners ready to grow their businesses

As your business grows and begins making more profitable it may be time for an S-Corp election

Who Shouldn’t Elect S-Corp Status?

Before jumping in, it’s worth considering whether the S-Corp path actually aligns with your business goals. It’s not the right fit for everyone.

❌ Microbusinesses Likely to Stay Small

If your business is earning under $50K in profit or expected to remain part-time or seasonal, the cost and complexity of running an S-Corp may outweigh the tax benefits.

❌ Businesses with Complex P&L Allocations

S-Corps must allocate profits and losses strictly based on ownership percentage. If you have a partnership or team with flexible or custom sharing arrangements, a multi-member LLC or partnership may offer more flexibility.

❌ Startups Seeking Outside Funding

S-Corps are a poor fit for businesses looking to raise venture capital. They can only have one class of stock and a limited number of shareholders—all of whom must be individuals or qualifying trusts. Most institutional investors will require you to be a Delaware C-Corp .

Trade-Offs and Considerations

Even if you’re a good candidate for S-Corp status, there are trade-offs:

• Payroll Setup & Maintenance: Required, even for solo founders

• Administrative Complexity: More forms, formalities, and tax filing

• Documented Compensation: Pay yourself too little, and the IRS may object

• Better bookkeeping: You must maintain accurate and separate books and records

• Profit Distribution Rules: Must be proportional to ownership—no exceptions

Bottom Line

S-Corps offer a powerful tax advantage—but only for the right kind of business. If your business is profitable and you’re ready for a bit more formality, it can save you thousands per year in taxes. But if you plan to stay small, have complex ownership, or plan to raise money, another structure may serve you better.

The right structure isn’t just about saving money—it’s about building a business that works for you.

Evin Wick JD, LLM is a Georgetown-trained tax lawyer and co-founder of Scorpu, where he channels two decades of small-business tax expertise into streamlined S-Corp, bookkeeping, and payroll solutions for solo consultants.

https://www.linkedin.com/in/evin-wick/

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