Electing S corporation status offers a unique combination: the tax benefits of a partnership or LLC, the liability protection of a corporation, and potential savings on self-employment taxes.
When your operation is structured as an S corporation, it becomes a separate legal entity from you as an individual. That means you limit your personal financial liability when it comes to business debts and lawsuits while also making it easier to sell your business or pass it on to the next generation. Electing S corporation status may also lower your tax bill, because S corporation income isn’t subject to self-employment tax.
But you must take extra, formal steps to have your farm recognized and taxed as an S corp by the IRS. And when your business is an S corp, tax filing—and your finances in general—become more complicated.
Ultimately, if you’re deciding on whether to elect S corp status, your best bet is to consult with a trusted legal or tax professional. But before sitting down with a lawyer, you should have a grasp of how S corporations work, their benefits and drawbacks, how to elect S corp status, and how to pay yourself when your farm is treated as an S corporation.
Here’s what you need to know.
What is an S corporation?
While it is often referred to as a business structure, an S corporation (commonly referred to as “S corp”) is actually a tax classification recognized by the IRS.
If your operation is already structured as a limited liability company (LLC) or a C corporation, you can elect—that is, choose—to have it treated as an S corp. When you do, your business retains some benefits of a traditional corporation but is taxed more like a partnership.
As a pass-through entity, the S corp itself is not subject to income tax. Instead, all tax obligations pass through to the shareholders, who report them on their individual tax returns—and if you’re the sole shareholder, they pass through to you.
Here’s a summary comparison of S corps with other business types:
| Business Liability Protection | Income Passed Through | Self-Employment Income Savings | |
|---|---|---|---|
| C corporation | ✓ | ✓ | |
| Sole proprietorship or partnership | ✓ | ||
| Limited Liability Company (LLC) | ✓ | ✓ | |
| S corporation | ✓ | ✓ | ✓ |
S corporations vs. C corporations: what’s the difference?
A C corporation is what you might think of as a ‘traditional’ corporation. It is the standard, or “default” corporation in the eyes of the IRS. It’s a separate legal entity from its owners (the shareholders), meaning it can own assets, take on debt, enter into contracts, and be sued independently of the individuals who own it.
Shareholders own percentages of the C corporation, which pays its employees in salaries and wages, and distributes profits to shareholders as dividends. C corporations pay income taxes on their profits at the corporate tax rate. Then dividends are taxed again on the shareholders’ personal returns at their individual tax rates. That’s what people mean when they say a C corporation is ‘double taxed’.
An S corp, in contrast, avoids double taxation. It does not pay corporate income tax. Instead of the business paying taxes, profits (or losses) flow directly or ‘pass through’ to the owner’s personal tax return. Any earnings employees or shareholders receive are taxed at their individual tax rates.
Both C corporations and S corporations:
Allow individuals to own shares in the company
Offer limited liability protection for their owners
Exist independently of their owners, are responsible for their own liabilities (debts) and any lawsuits brought against them
Can own assets like land, equipment, or shares in other businesses
Generally speaking, it is less expensive and more straightforward to set up an S corp than a C corporation. And so long as it meets the IRS’s requirements, a C corporation can elect S corp status by filing Form 2553.
LLCs vs. S corporations: what’s the difference?
A Limited Liability Company (LLC) is a type of business entity formed at the state level. You form an LLC by filing articles of organization with your Secretary of State.
Once you have registered as an LLC, your business is considered a separate legal entity from you as an individual. If your LLC defaults on its debts, debt collectors can come after its assets, but not your personal assets. Similarly, if your LLC is sued, it’s your LLC’s assets that are under threat, not your own.
Contrast this with a sole proprietorship, which is the default business structure. As soon as you start earning income as an individual and not an employee, the IRS considers you a sole proprietor if you haven’t set up another formal business structure. Your business and your person are identical—whatever your business is liable for, like debts or lawsuits, you are also liable for.
For a deeper dive, check out our guide to LLC status for farmers.
In order to elect S corp status, your ag operation must either be registered as an LLC or a C corporation. Because C corporations are expensive and complicated to set up, most producers who want to elect S corp status first form LLCs.
An LLC is recognized as a legal entity at the state level. At the federal level, it’s recognized according to the tax status it elects. An LLC can elect to file taxes as either an S corporation, a partnership, a single-member LLC (similar to a sole proprietor, but with added liability protection), or a C corporation.
What are the benefits of an S corporation?
1. Reduced tax burden
As the owner of an S corp, you pay income tax on the business’s profits at your personal income tax rate. However, you only pay self-employment tax (Social Security and m Medicare) on the wages you pay yourself as an employee of the S corp. Self-employment tax is currently 15.3% of net income, up to the Social Security wage base limit, which is $176,100 in 2025.
For example, if your operation is taxed as an S corp and earns $200,000 net income, and you pay yourself a salary of $70,000, you only pay self-employment tax on the $70,000.
On the other hand, if you are a sole proprietor and your farm earns $200,000 net income, you pay self-employment tax on $176,100, which is the Social Security wage base for the year.
Additionally, as an S corp shareholder, you can also receive distributions from the business. These distributions are treated as returns on investment and are not subject to self-employment tax, though they are subject to income tax.
2. Liability protection
Since it is registered at the state level as an LLC, your S corporation enjoys the same liability protection as an LLC.
This means the business is treated as a separate entity. It is responsible for its own debts and obligations, and your personal assets are generally protected from business creditors and lawsuits.
However, this liability protection is not automatic or absolute. It depends on your adherence to certain formalities, such as keeping business and personal finances separate, maintaining accurate records, and acting in accordance with corporate governance requirements (more on that below).
3. No double taxation
Unlike a C corporation, an S corp does not pay corporate income tax. Instead, its income, losses, deductions, and credits pass through to shareholders, who report them on their personal tax returns.
This structure avoids “double taxation,” where income is taxed at both the corporate and individual levels. At the same time, you retain many of the advantages, such as separate legal entity status, limited liability, and the ability to have multiple shareholders.
4. Easier succession planning
If you plan to transfer your operation to a successor or sell it in the future, having it structured as an S corp can simplify the process.
Ownership of the business can be transferred by selling or gifting shares of the corporation. The buyer or heir becomes the new owner by acquiring the shares, rather than by individually transferring each of the farm or ranch’s assets. This can significantly reduce legal complexity and potential tax consequences. In contrast, with a sole proprietorship, you must transfer each asset individually. This process can be both cumbersome and expensive.
5. Better business practices
As with running an LLC, running an S corp requires you to organize your business more thoroughly than you would if your farm were a sole proprietorship.
You must hold annual meetings among shareholders (if you have multiple shareholders), keep your business and personal financial activities separated, and carefully account for your S corp’s income and expenses in order to benefit from reduced taxes.
Registering as an LLC and electing S corp status may spur you to give your finances an overhaul and start following tidier business practices.
What are the drawbacks of an S corporation?
1. Added expenses
Forming and maintaining an S corporation comes at a cost. First, it takes time and money to draft articles of organization and an operating agreement, and to register your business as an LLC. Then there are ongoing expenses, such as:
Legal consultation
Registering your LLC
Paying annual franchise tax for your LLC (rates vary according to state)
Hiring an accountant to file Form 2553 (S corp tax election)
Running payroll to pay yourself a salary
Paying additional accounting fees (S corp taxes are typically more complex than individual returns to have professionally prepared)
Hiring a bookkeeper
As a general estimate, you might pay $5,000 to $6,000 for your first year in business as an S corporation, and $4,000 to $4,500 annually thereafter.
In contrast, a sole proprietorship comes with fewer costs. You may not need to file formation paperwork, pay franchise taxes, or hire a payroll service. Furthermore, accounting and tax filing are often simpler and less expensive.
2. It only makes sense beyond a certain income threshold
Because of these ongoing costs, forming an S corp makes financial sense once your operation reaches a certain level of net income. Below that threshold, the tax savings may not justify the added complexity.
As a general guideline, businesses benefit from S corp status once they predictably earn around $100,000 in net income. But each operation is different! You should work with an accountant to run projections for your specific situation.
For example: say you expect to earn at least $100,000 per year and pay yourself a salary of $50,000.
As a sole proprietorship, all of that $100,000 would be subject to the 15.3% self-employment tax, costing you around $15,300.
If you made an S corp election, you’d pay $7,650 in self-employment taxes ($50,000 x 15.3%).
Now, consider your added S corp costs:
Legal and accounting fees: $3,500
Registration fees: $50
Franchise taxes to the state: $800
Payroll costs: $660
Total: $5,010
So, your net savings from making an S Corp election would be $2,640. ($15,300 in sole prop taxes, minus $7,650 S corp taxes, minus $5,010 in added S corp costs = $2,640).
If you earn less than that, or if your income is highly variable, S corp status could put you at a disadvantage compared to operating as a sole proprietor.
3. Limited liability is not guaranteed
One benefit of forming an LLC taxed as an S corp is limited liability, but it isn’t automatic. You must properly maintain what’s called the ‘corporate veil,’ which protects your personal assets from business liabilities.
For the most part, you maintain the corporate veil by keeping your personal and business finances separated, with different bank accounts, different sets of books, and clear boundaries when it comes to how you use business assets for personal purposes and vice versa.
If you fail to follow these practices (for example, by personally guaranteeing a business loan), the court may “pierce the corporate veil,” and you could be found personally liable for your S corporation’s debts.
Operating as a sole proprietor does not offer you the liability protection of an S corporation, but it also does not require you to maintain the corporate veil.
4. More complicated tax filing
When your business is an S corp, you need to file additional tax forms each year. You’ll need to file IRS Form 1120-S, pay unemployment insurance taxes, and possibly file quarterly estimated taxes for both the corporation and yourself.
Hiring an accountant becomes more of a necessity than a luxury, and you will most likely need to sign up for a payroll service to handle tax remittances.
5. Land ownership can get complicated
In general, it’s a bad idea for S corps to own real estate, especially productive agricultural land. That’s because if you ever decide to transfer ownership of the land back to yourself as an individual—for instance, upon retirement or dissolution—you may need to pay a hefty amount in capital gains tax on the appreciated value of the property.
Additionally, your ability to take distributions from the S corp is limited by your basis (your investment in the business). If your basis is low, and you take distributions in excess of it, those amounts are taxed as capital gains.
While you can increase your basis by contributing land to the S corp, doing so transfers ownership to the business and creates future tax and flexibility complications. So if you elect S corp status, you may have some difficult decisions to make about which entity, you or your business, owns the land.
For that reason, many advisors suggest keeping land ownership separate from the S corp. A common approach is to hold land in your name or in an LLC taxed as a partnership, then lease it to your operating S corp.
C corporations can avoid this problem with a split-interest purchase, where ownership of the land is shared between the shareholders and the corporation, and eventually reverts to the individual shareholder. However, this strategy comes with its own legal and tax complexity and should only be pursued with expert guidance.
How do I set up an S corporation?
On paper, setting up an S corp is straightforward. However, many of the steps involve legal and tax complexities, so it’s wise (and sometimes necessary) to consult an accountant or attorney familiar with agricultural businesses.
1. Check your eligibility
Most family-run agricultural operations are eligible for S corp status. Still, to qualify, make sure your business meets the following IRS requirements:
It must be a domestic entity (formed in one of the 50 US states or D.C.)
All owners (i.e. shareholders) are US citizens or resident aliens
All shareholders are individuals, estates, tax-exempt organizations, or qualified trusts (not partnerships or corporations)
The business has 100 or fewer shareholders
2. Form an LLC or corporation
Before you can elect S corp tax status, you must first form a legal business entity, either an LLC or a corporation at the state level.
Most agricultural producers choose to form an LLC and then elect to have it taxed as an S corp. This gives you the operational flexibility of an LLC with the tax advantages of an S corp.
To form an LLC, you’ll need to file articles of organization with your state’s Secretary of State and, in most cases, create an operating agreement that outlines how your operation will be governed. For more on how to do this, check out our guide to LLCs for farmers.
3. File Form 2553 (and Form 8832 if you’re an LLC)
To elect S corp tax status as a corporation, you must file IRS Form 2553, ‘Election by a Small Business Corporation.’ If you’re an LLC, there’s an additional step you’ll have to take before that: file Form 8832, ‘Entity Classification Election,’ and elect to be taxed as a corporation.
If you want your S corp status to take effect for the current tax year, Form 2553 must be filed within 2 months and 15 days after the start of the tax year (for example, by March 15 if your tax year begins January 1). If you file after that deadline, your election will take effect in the next tax year.
Form 2553 includes basic tax information such as the business’s name, address, and EIN (employer identification number), as well as the effective date of your election.
How do you pay yourself with an S corporation?
One of the biggest differences between an S corp and a sole proprietorship (or a single-member LLC) is the need to pay yourself.
With an S corp, it’s not enough to dip into your business bank account whenever you need cash. All the income you receive from your S corp must be tracked and reported in order to maintain S corp status and preserve the liability protection provided by the corporate veil.
In most cases, that means paying yourself a salary through payroll, and tracking and reporting any distributions you receive as a shareholder.
But first, the basics. Here’s a breakdown of the two ways S corp owners pay themselves.
Distributions vs. Salary
Salary. If you play a role in the day-to-day operations of your operation, the IRS requires you to pay yourself a reasonable salary. This is treated as regular employee compensation and income tax, self-employment tax, and unemployment insurance is withheld and remitted.
Distributions. In addition to your salary, you may receive distributions of profits. These are returns on your ownership investment in the business. Distributions are tax-free up to the amount of your basis in the corporation. Your basis is the value of assets you have invested in your S corp, and it can change from one year to the next. Anything in excess of your basis amount is taxed as capital gains.
How to set a reasonable salary with your S corporation
To prevent business owners from avoiding self-employment taxes by taking only distributions, the IRS requires S corp shareholders who perform work for the business to pay themselves a reasonable salary before taking any distributions.
If it weren’t for this requirement, the owner of an S corp could take all their earnings in the form of distributions. This would allow them to avoid paying self-employment tax, as well as some of the tax on their income.
In the eyes of the IRS, this is unfair. So before you can pay yourself any distributions, you need to pay yourself a salary—and it needs to be a reasonable one.
A reasonable salary is the amount the IRS believes you should earn based on your role in your business, your experience, and your level of expertise and training. What constitutes a reasonable salary may also be based on your location. For instance, the average owner-operator in California may earn a different salary from the average owner-operator in Arkansas.
The IRS does not provide a hard number, but may audit your returns and reclassify distributions as wages if the salary appears artificially low. For example, if the median income for owner-operators is $90,000 and you pay yourself $30,000 while taking large distributions, the IRS could view that as an attempt to avoid payroll taxes. In such cases, you may owe back taxes, penalties, and interest.
You can use sources like the U.S. Bureau of Labor Statistics, your state’s department of agriculture, or industry benchmarks to help determine a defensible salary. An accountant familiar with agricultural businesses can also help guide this decision.
Set up payroll
In order to pay yourself, you must establish a payroll system. Running payroll keeps your accounting organized and ensures you withhold and pay the correct amount in taxes.
Setting up payroll requires you to prepare and file multiple forms (such as Form W-2). You also need to store all of your personal information for easy access when your corporation files taxes after the end of the year.
Most S corp owners run payroll typically twice per month or every two weeks. To run payroll, you calculate:
Your earnings for the pay period based on your annual salary
Income tax and FICA (Social Security and Medicare)
Contributions to retirement savings or health spending accounts (HSAs)
The corporation’s share of FICA
The corporation’s unemployment insurance tax payments
The total necessary funds to withhold from all of the above taxes and contributions
In addition, your S corp must remit and withhold income tax and FICA to the IRS (typically each month) and pay unemployment insurance (quarterly).
As a function of payroll, you also receive a pay stub reporting your earnings for the pay period, all withholdings and contributions, and your total earnings to date for the calendar year.
All of this takes a lot of work, particularly if you have no experience running payroll. For that reason, most farms electing S corp status run their payroll through a third-party provider.
Make distributions
After paying yourself a reasonable salary, you may take distributions from your business profits. These must be properly recorded and reported.
You report your distributions for the year on Schedule K-1, as well as Schedule D and Form 8949 in the case of distributions above your basis in the company.
Because tracking basis and correctly allocating distributions can be complex, many S corp owners work with a CPA to file their business and personal tax returns. This added complexity, and the need to prepare corporate returns and shareholder schedules, is one reason why accountants generally charge more for S corp tax filings than for individual or sole proprietorship returns.
Make monthly & quarterly payments & remittances
In most cases, your S corp is responsible for remitting several recurring tax payments. This can include quarterly payments for federal unemployment tax (FUTA) and state unemployment insurance, and monthly deposits for withheld federal income tax and FICA (Social Security and Medicare), typically made through EFTPS or a payroll provider.
Some of this work—namely, calculating withholdings and preparing tax forms—may be done through your payroll provider.
Ambrook makes S corp taxes simpler
Even after you have elected S corp status, the IRS requires you to file Schedule F of Form 1040 to report all farm income. Luckily, Ambrook specializes in Schedule F: when you use Ambrook, all of your transactions are categorized to match up with Schedule F’s different sections, guaranteeing simpler tax prep for your farm.
Plus, with time-saving bookkeeping automation features, automatically-generated financial reports, streamlined bill pay and invoicing, and other powerful accounting and financial management tools, Ambrook doesn’t just make expense and revenue tracking simple: it takes the guesswork out of running your business.
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This resource is provided for general informational purposes only. It does not constitute professional tax, legal, or accounting advice. The information may not apply to your specific situation. Please consult with a qualified tax professional regarding your individual circumstances before making any tax-related decisions.
