How to File an S Corp: Everything You Need to Know
All corporations and LLCs are formed at the state level, either with the secretary of state or the state division of corporations.3 min read
2. Choose the State of Incorporation
3. Choose Business Name
4. Create and File Articles of Incorporation
5. Apply for Employer Identification Number
6. File IRS Form 2553
8. What Are the Key Advantages of Forming an S Corporation?
If wondering how to file an S corp, first know that an S corporation is a normal corporation that has elected the "S corporation" tax status. All corporations and LLCs are formed at the state level, either with the secretary of state or the state division of corporations.
The key steps to file an S corporation are:
- Check S corporation eligibility requirements
- Choose state of incorporation
- Choose business name
- Create and file articles of incorporation
- Apply for employer identification number (EIN)
- File IRS Form 2553
Check S Corporation Eligibility Requirements
The corporation will be eligible to become an S corporation if the following are true:
- U.S. based corporation
- Less than 100 shareholders
- Only have one type of stock
- Shareholders are not partnerships, corporations, a certain type of trusts, or non-residents
- All shareholders consent to S corporation election
The corporation will be ineligible to become an S corporation if the following are true:
- Bank or thrift company that uses reserve method of accounting for bad debts
- Insurance company taxable under subchapter L
- A possession corporation
- A current or former domestic international sales corporation
Choose the State of Incorporation
The first preliminary step is to choose the state of incorporation. The decision will be based on factors such as, but not limited to:
- The physical presence of the corporation
- Location of corporation's bank accounts
- Location of employees
- Area of operation
Choose Business Name
Check that the business name is available in the state of incorporation. This can be checked by using the local secretary of state website.
Create and File Articles of Incorporation
Create and file the articles of incorporation with the local secretary of state. A filing fee will also need to be paid.
Apply for Employer Identification Number
Complete IRS Form SS-4 to apply for an Employer Identification Number (EIN). This form can be completed online, by mail, or over the phone.
File IRS Form 2553
Complete and file IRS Form 2553. The IRS form will contain the following information:
- Business name
- Employer identification number
- Corporation address
- Incorporation state
- Incorporation date
- The effective date of S corporation election
- Shareholder information
- Tax year - this will need to be agreed upon by all shareholders
The service center will notify you whether the application is accepted or rejected within 60 days of filing. If the selected tax year is based on "business tax purpose," the application decision may take an additional 90 days.
Once the IRS' acceptance letter is received, the corporation is now officially operating as an S corporation.
It is important to create bylaws that state company rules about operations, officer positions, roles, and responsibilities. Although bylaws may not be required by the state, it is advisable to create formal rules to ensure a common understanding among shareholders.
Board and shareholder meeting minutes should also be retained for records. Minutes are important as they document all formalized decisions such as the appointment of board members, officers, and other key corporate resolutions.
The S corporation election will remain until it is terminated or revoked by a shareholder resolution.
What Are the Key Advantages of Forming an S Corporation?
The key advantages of forming an S corporation include:
- No corporate income taxes. Income taxes are based on individual tax returns.
- Shareholders are not personally liable for the corporation's debts or liabilities.
- Similar to an LLC, an S corporation is a pass-through entity. This means that the S corporation's income will flow through to the shareholders' personal income tax.
- Shareholders have greater flexibility in the management of the company.
- S corporation stocks are more transferable compared to LLCs. Shareholders of S corporation stocks can sell their ownership interest without seeking approval from the other shareholders.
- Additional capital can be easily raised by selling shares.
- General perception that it is more structured than a sole proprietorship or general partnership.
- Generally audited less frequently than sole proprietorships.
An S corporation election may not be suitable if the corporation's long-term business goals involve expansion and a need for a public offering, international shareholders, or the creation of different stock classes. In some circumstances, a C corporation may be more appropriate.
If you need help with filing an S corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.