Creating an S Corp: Everything You Need to Know
When creating an S corp, there are key steps you must take before you can begin conducting business. 3 min read
When creating an S corp, there are key steps you must take before you can begin conducting business. This type of business is essentially a corporation that has elected to be an S Corporation for taxation purposes. Offering a range of benefits, including protection against personal liability and double-taxation, you must meet certain specifications in order to qualify. Follow the steps and guidelines below in order to benefit from S Corporation status.
What is an S Corporation?
In order to be differentiated as an S Corporation, a corporation needs to apply for the appropriate tax status. Upon forming an S Corporation, this offers protection against personal liability and helps owners avoid double-taxation. Something which C Corporations face. Originally designed to bridge the gap between a corporation and partnership, S-Corporation status offers many perks.
Guide to Creating an S Corporation
If you plan on incorporating your business, you must first decide which state you would like to form your corporation in. When making this decision, you should consider:
- How physically present you will be in relation to daily operations
- Where you plan to hire your employees
- The location of your bank accounts
- Which state you will likely conduct the majority of your business in terms of sales
Once you have considered these variables, please follow these steps:
- Step one: Conduct a name search to ensure that your desired name is not already taken. Your name must also be unique to avoid any confusion. If you already have a business a name, you will need to end either "incorporated" or "Inc." to the end.
- Step two: If you plan to conduct business under a name other than your own, you will need to file a DBA — or a "doing business as."
- Step three: Next, you need to file your articles of incorporation with the Secretary of State.
- Step four: Prepare all corporate bylaws in order to fully summarize company rules and operations. Although some states do not require bylaws, it is highly recommended that you create bylaws and maintain them for your own personal records.
- Step five: Record corporate minutes in relation to all meetings among board members and shareholders.
- Step six: Apply for an EIN or an "employer identification number" by filing Form SS-4.
- Step seven: Be mindful of any local and/or state permits you may need to legally operate your business.
Once you follow these steps, you will then need to make sure that you are eligible for S Corporation status. If you do qualify, you must then follow all guidelines moving forward, especially in terms of taxation. For example, once your corporation is formed, you will then need to file Form 2553 with the IRS.
S Corp Advantages
Once you have qualified for S Corporation status, you will enjoy a number of advantages. These include but are not limited to:
- One of the main reasons that small businesses seek S Corporation status is due to pass-through taxation.
- As an owner of an S Corporation, you will not typically be personally liable for any company debt.
- Ownership can be easily transferred by selling stock. Also, additional capital can be raised by selling stock shares.
- In comparison to a partnership or sole proprietorship, an S Corporation is often perceived as a more professional entity.
- If an owner dies or experiences a disabling illness, the corporation will still exist.
- Based on the taxation rules set by the IRS, all company losses and profits will pass-through to each shareholder based on their shares in the company.
- On average, s corps are audited on a less frequent basis than sole proprietorships.
- As an owner of an S Corporation, you will benefit from self-employment tax savings. This is because owners are classified as employees.
If you are unsure whether you qualify for S Corporation or you are unclear about the process, it is recommended that you seek professional assistance. This is particularly true when multiple shareholders are involved, as you may have a maximum of 100 shareholders. Follow each step above and be sure to practice due diligence. When you create an S Corporation properly from the start, you will ensure long-term success.
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