S-Corporation
An S Corporation, or S-Corp, isn't a separate business entity type under Kentucky law—rather, it's a federal tax election that an eligible corporation (or LLC) can make with the IRS. A business first forms as a standard corporation (or sometimes an LLC) under Kentucky law, then elects S-Corp status for tax purposes, which allows profits and losses to pass through to the owners' personal tax returns rather than being taxed twice like a C-Corp. Because of IRS restrictions on who can own an S-Corp and how it can be structured, this option tends to suit smaller, closely held businesses rather than companies planning to raise significant outside investment.
Ownership and Control
S-Corps are limited to no more than 100 shareholders, all of whom must generally be U.S. citizens or residents (certain trusts and estates may also qualify, but other corporations, partnerships, and non-resident aliens cannot be shareholders). S-Corps may only issue one class of stock, though differences in voting rights within that class are permitted.
Liability Protection
Like a C-Corp, an S-Corp offers limited liability protection. Shareholders' personal assets are generally protected from the business's debts and legal liabilities, with financial risk typically limited to their investment in the company.
Taxation Method
S-Corps are pass-through entities for federal tax purposes, meaning the business itself generally doesn't pay federal income tax; instead, profits and losses pass through to shareholders, who report them on their personal tax returns. This avoids the "double taxation" that applies to C-Corps. S-Corp status can also offer potential savings on self-employment taxes for owners who work in the business, since a portion of income can be paid out as distributions rather than salary, though the IRS requires owner-employees to pay themselves "reasonable compensation" first.
Management Structure
Because S-Corp status is a tax election rather than its own entity type, the underlying management structure depends on which entity made the election. If the S-Corp election is made by a corporation, management follows the standard corporate structure: shareholders elect a board of directors, who oversee company policy and appoint officers to manage daily operations, with the details governed by the corporation's bylaws. If the election is made by an LLC, management instead follows the LLC's own structure—member-managed or manager-managed, as outlined in the LLC's operating agreement—even though the business is taxed as an S-Corp for federal purposes.
Ease of Raising Capital
S-Corps face more limitations on raising capital than C-Corps, since they can have no more than 100 shareholders, can only issue one class of stock, and generally cannot have institutional or foreign investors as owners. This makes S-Corps less attractive to venture capital investors, who typically prefer the flexibility of a C-Corp.
Ease of Formation
Forming an S-Corp requires the same steps as forming a standard Kentucky corporation or LLC, plus an additional step: filing an election with the IRS to be taxed as an S-Corp, which must meet specific eligibility requirements and deadlines.
Ongoing Compliance
S-Corps carry the same ongoing compliance obligations as the underlying entity at the state level—annual reports, fees, meetings, and recordkeeping—plus additional IRS requirements to maintain S-Corp status, such as monitoring shareholder eligibility and ensuring only one class of stock is issued.