An S corporation avoids double taxation of profits. To qualify, it must have 100 or fewer U.S. citizen shareholders. It also cannot be owned by another business.
S corps file an information return but do not pay taxes themselves. Income passes through to shareholders who report it on their personal tax returns. They get a K-1 showing their share. Employment taxes still apply to shareholder salaries.
A major S corp advantage is tax savings versus a regular C corporation. Income is only taxed once at the shareholder level, resulting in significant savings.
S corps avoid some payroll taxes too. Shareholders only pay these on the salary portion, not distributions. This is a major loophole that saves on Medicare and Social Security taxes.
If an S corp earns $100,000, the shareholder could take a $40,000 salary and $60,000 distribution, avoiding payroll taxes on the $60,000.
However, some extra administration costs are involved. Also, income sources are restricted.
In summary, an S corp offers tax savings versus a corporation. Income passes through and avoids double taxation. Shareholders avoid some payroll taxes on distributions. However, extra costs are involved.