There have been a lot of articles in tax and accounting journals lately about how the IRS is scrutinizing S Corporations more and more with respect to "reasonable compensation". IRS has the right to recharacterize any payments made to a shareholder of an S Corporation as wages, and therefore, collect payroll taxes. It has been argued that the sole shareholder of an S Corporation that has no other employees other than the shareholder cannot justify taking ANY profit as distributions and must pay all profit as salary. This is an ongoing debate.

As far as the limited liability, my understanding is the same as Andrew's in that the corporation does not protect one from a malpractice claim.

I'm not a fan of the S Corporation due to the above and its inflexibility.

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