Consider an S corp if you’re starting a tiny business and desire to explore a business structure with major levy advantages.
Choosing the correct business structure for your business is significant, since it determines the rules for raising capital distribution, compensating employees, and filing taxes. Here, discover the benefits of filing as an S corp, plus everything you require to recognize about how to commence an S corp.
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What is an S corporation?
An S corporation (or S corp) is a legal business structure and levy designation distinguished by its pass-through levy position. S corps don’t pay corporate taxes. Instead, they pass all corporate turnover, losses, deductions, and credits to shareholders, who include them in their personal turnover levy filings.
Known as “pass-through taxation,” this structure prevents so-called double taxation on corporate returns since business distributions are reported by person shareholders, but not by shareholders and the S corporation.
Should you commence an S corporation?
Before implementing an S corp business structure, inquire yourself these questions:
- Do you require or aspiration to raise money by issuing ownership?
- Are you comfortable facing limits on the number of shareholders you can issue ownership to?
- Do you foresee having investors who are foreign individuals or business entities?
- Do you foresee selling your business at any point?
- Can you afford double taxation? If not, are you comfortable with stricter IRS scrutiny?
How to commence an S corp in 10 steps
- Choose a business name for your S corp
- File articles of incorporation
- Issue ownership for your S corp
- Elect a board of directors and appoint officers
- Meet other S corp eligibility requirements
- Obtain an employer identification number
- Elect S corp position
- Apply for state and local S corp business licenses
- make S corp bylaws
- Schedule and hold annual meetings
1. Choose a business name for your S corp
First, choose a distinctive name for your recent business that isn’t already registered to another business entity in your state. Check your local secretary of state’s website to view if your business name is available. Be sure to pursue your state’s naming rules, which likely proscribe avoiding profanity and misleading terms.
Don’t worry if you’re not 100% sure about your business name—you can eventually conduct business under a different “doing business as” (DBA) name, which you’ll also file with your state secretary.
2. File articles of incorporation
Once you have a name, you can commence formalizing your S corporation by filing articles of incorporation (or a certificate of incorporation) with the IRS and the state where you schedule to incorporate.
Details differ by state, but articles of incorporation are typically a one-pager that includes:
- A brief description of the business and its purpose
- The office address of your corporation
- The name and address of your registered agent for service of procedure (i.e., someone to receive legal documents and court summonses)
- The ownership structure of the corporation, including the number of shares it is authorized to issue
Most secretary of state’s offices propose articles of incorporation forms and require a fee to file them.
Your recent corporation will be designated a C corp until you meet the remaining S corp requirements.
3. Issue ownership for your S corp
Once you’ve incorporated, you can issue ownership for your recent corporation. You can distribute them as document or electronic certificates.
S corporations must pursue strict requirements for issuing ownership and must limit shareholders to 100 or fewer.
Other rules for issuing stocks include:
- S corps may issue only one class of ownership. That means S corps may only propose ordinary ownership (with voting rights); they may not propose preferred ownership (distribution priority, no voting rights).
- S corporation shareholders must be citizens or permanent residents of the US, not non-resident aliens or foreign citizens.
- S corp shareholders must be individuals, not other corporations.
S corps can provide prospective shareholders with independent third-event ownership evaluation, although it’s not required to issue ownership.
4. Elect a board of directors and appoint officers
Once you have shareholders, you can elect a board of directors to govern your S corp. All S corps require at least one director. This board can appoint officers to manage the corporation’s day-to-day operations.
5. Meet other S corp eligibility requirements
The Internal turnover Service (IRS) dictates additional conditions that corporations must meet to get S corp position.
First, an S corp must be a domestic, not foreign, corporation from an eligible industry. Ineligible corporation types include insurance companies, sure budgetary institutions, and domestic international sales corporations.
6. Obtain an employer identification number
Corporations and partnerships must obtain an employer identification number (EIN) for federal levy purposes. Several significant business milestones require an EIN.
Tasks that require an EIN include:
- Setting up payroll to compensate S corp employees
- Opening business financial institution accounts with budgetary institutions
- Building capitalization in the name of your S corp
- Applying for local permits and licenses
S corps can obtain an EIN by completing and filing IRS Form SS-4.
7. Elect S corp position
Once you’ve incorporated your business and met the S corp requirements, you can gain S corporation position by filing Form 2553 (Election by a tiny Business Corporation) with the IRS. All of your corporation shareholders must sign this document before filing.
Compared to other business formats, S corporation levy debt can be complicated by strict scrutiny from the IRS. This stringency discourages S corporation owners from choosing the business structure solely to evade taxes.
8. Apply for state and local S corp business licenses
Once you’ve satisfied your federal obligations, you still require to meet remaining state legal and levy obligations. For instance, California requires its own paperwork for corporations operating as S corps (e.g., articles of organization, initial statement of information, and operating agreement).
Also, most states collect their own corporate turnover taxes, though rates vary. To maintain S corporation levy position and its significant levy reserves, pursue local laws and ensure you obtain all the essential licenses and permits. For more information about state rules for S corps, consult a levy professional.
9. make S corp bylaws
Next, write and file corporate bylaws to govern your S corp. These bylaws are management rules and regulations established by your business’s board of directors.
Bylaws will vary from one S corporation to the next, but they typically define practices for appointing and removing board members and other officers, and include rules for issuing ownership, voting, and scheduling annual meetings.
10. Schedule and hold annual meetings
Like C corps, S corps must hold regular board and shareholder meetings, and keep detailed minutes. These minutes formalize decisions made during meetings, including but not limited to appointing board members, officers, and other relevant resolutions.
Most states require that more than half of an S corp’s shares be represented at annual meetings to meet quorum. You can set a higher quorum requirement in your corporation’s bylaws if you aspiration.
Key advantages of an S corp
Taxes
- Pass-through taxation
- Avoidance of double taxation
- Potential levy benefits for self-employment taxes
- Potential state levy advantages
Protection
- Limited debt protection
- Perpetual existence
capitalization and transactions
- Credibility with investors and customers
- Easier transfer of ownership
- Ability to raise capital distribution through ownership
- Simplified monetary reporting and record-keeping
How much does it expense to commence an S corp?
You’ll pay filing fees to state and federal governments when submitting your articles of incorporation, acquiring licenses, and obtaining an EIN. The expense to commence an S corp varies by state, but you can expect to pay between $800 to $3,000, excluding lawyer’s fees.
commence the business of your dreams today
An S corporation is a strategic selection that can provide levy advantages and legal protection for recent business owners.
Following the steps above, you can establish your S corp and enjoy the benefits of pass-through taxation and limited debt.
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How to commence an S corp FAQ
Can one person run an S corp?
Yes, one person can form an S corporation and serve as its sole board member and employee. Note, however, that you’ll still require to hold annual board of directors meetings and receive minutes at those meetings, even if you’re the only attendee.
How do owners of S corps pay themselves?
As the sole owner and employee of an S corp, you must receive a reasonable salary as defined by the IRS. This requirement ensures owners can’t use S corporation levy position as an excuse to pay themselves solely via levy-free distributions.
Do S corps pay taxes directly?
Rather than pay turnover levy directly to the Internal turnover Service (IRS), S corps pass corporate turnover to their shareholders, who then pay personal turnover levy on their returns.
Can I set up an S corp myself?
While it’s feasible to file articles of incorporation and leave through the S corporation election procedure on your own, S corp requirements are strict and complicated. It’s recommended you consult an attorney or levy professional.
