What Is an S-Corp and Should You Elect S-Corp Status for Your Business?

Written By Jennifer Siguenza

If you’ve been in business for a little while, you’ve probably heard someone say something to the effect of, “You should really make your business an S-Corp. It'll save you money on taxes.”

And at first glance, that sounds great.

But what exactly is an S-Corp, and how do you know if it’s the right move for you? Like most tax decisions, it’s worth understanding how it actually works before making a change.

Let’s break it down in a clear, straightforward way.

So… what is an S-Corp?

An S-Corporation (S-Corp) isn’t a type of business structure like an LLC or corporation, it’s a tax election you make with the IRS. Think of it as a status you can choose that changes how your business income is taxed.

If you currently have an LLC or a corporation, you can elect to be taxed as an S-Corp. That election tells the IRS you want your business income to be taxed differently, often with the goal of improving tax efficiency.

Why people talk about S-Corps (and the tax savings part)

The biggest reason small business owners consider an S-Corp is because of how self-employment taxes work.

Here’s the simple version:

  • If you’re a sole proprietor or an LLC without an S-Corp election, you pay self-employment tax (about 15.3%) on all of your profit.

  • With an S-Corp, you pay yourself a reasonable salary (that part is subject to payroll taxes).

  • Any remaining profit can be taken as a distribution, which isn’t subject to self-employment tax.

In the right situation, this can reduce the amount of income subject to those taxes.

This structure also comes with additional responsibility. You’ll need to run payroll, file additional tax forms, and keep your books clean and consistent, while paying yourself a reasonable salary.

When an S-Corp might make sense

An S-Corp is often a great fit if:

  • Your business is generating consistent profit

  • Your business is already operating as an LLC or corporation

  • You’re ready to take on additional structure and responsibility

  • You’re thinking more strategically about how your business is set up

It might not make sense if you’re brand new, still testing your business model, or not yet making consistent profits. In those cases, simplicity usually wins.

What to be prepared for

Before electing S-Corp status, make sure you’re ready for:

  • Payroll setup: You’ll need to run payroll for yourself (and possibly others).

  • Separate filings: S-Corps file their own tax return (Form 1120-S).

  • Bookkeeping accuracy: Incomplete or inconsistent books can create issues at this level.

  • “Reasonable salary” debates: The IRS keeps an eye on business owners who pay themselves too little.

This is a decision where it’s worth slowing down and looking at the full picture. A good conversation with a knowledgeable financial professional like our team at Luna can help you determine whether it’s the right move for your business.

The human side of the decision

We often remind clients of this: your business structure should support you, not the other way around.

An S-Corp isn’t just a tax decision. When it’s implemented at the right time, it can support better planning, more clarity around your numbers, and more intentional decision-making as your business grows.

Every business owner’s story is different. That’s why this decision should be based on your numbers, your goals, and where your business is headed.

Bottom Line

An S-Corp can be a great tool for growing businesses, but it’s not a one size fits all solution. If you’re curious whether it’s right for you, let’s talk.

We’ll walk through your numbers, your goals, and your stage of business so you can make an informed decision… the right decision for you and your business.

Let’s make your business structure work for you. Schedule a call with Luna Business Services.

Jennifer Siguenza
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