How To Form an S Corp: Everything You Need to Know
Knowing how to form an S Corp, also known as a small business corporation or subchapter, will ensure you set up your business legally. 3 min read
Knowing how to form an S Corp, also known as a small business corporation or subchapter, will ensure you set up your business legally. It involves a few key steps, such as filing the necessary paperwork, paying required fees, and appointing shareholders and directors.
What Is an S-Corp and Who Can Form One?
To form an S-Corp, you'll need to adhere to the same formation requirements as for a C corporation. This includes filing a document of incorporation — such as a Certificate of Incorporation or an Articles of Incorporation — with the appropriate state agency and paying any required filing fees.
There are no restrictions on age or residency for forming a corporation. In some states, a person has to be at least 18 years old to be a director of a corporation. While there are no restrictions on who can form an S-Corp, there are some restrictions pertaining to ownership and shareholders. These restrictions include the following:
- All shareholders must give written consent to the S-Corp election.
- An S-Corp can have a maximum of 100 shareholders.
- S-Corps can only have one class of stock.
- No shareholder can be a non-resident alien.
- Shareholders cannot be other S-Corps, C-Corps, LLCs, partnerships, or trusts.
The Incorporation Process
The steps to incorporate are as follows:
- File an Articles of Incorporation with your state agency.
- Pay any initial fees.
- File Form 2553 with the IRS. This is your election for S-Corp status.
You'll have to include the following information on Form 2553:
- Company name and address
- EIN number
- Incorporation date
- State of incorporation
- Shareholder information
- Date of S-Corp election
- Fiscal tax year information
Your S corporation must hold a directors meeting, in which you must adopt bylaws. In this meeting, you must also appoint officers and approve important decisions, such as opening a business bank account. Be sure to keep minutes of all meetings. Distribute stock certificates to company shareholders and record all transactions.
You might need to obtain local and/or state permits, depending on your business.
An S-Corp's Organizational Structure
Three groups make up an S-Corp's organizational structure:
While shareholders own the S-Corp, they don't usually manage day-to-day operations. Instead, they tend to influence corporate decisions with the following actions:
- Electing directors
- Removing directors
- Approving/disapproving amendments to founding documents
- Voting on important corporate issues
Directors make up the corporation's board of directors and they manage business affairs. They typically are involved in major decision-making. They also appoint officers, who are the ones responsible for making day-to-day business decisions.
Advantages of S-Corps
Electing to run your corporation as an S-Corp comes with some advantages, such as the following:
- Limited liability protection: Typically, owners aren't responsible for business liabilities and debts.
- Easy ownership transfers: This can happen by selling stock shares.
- Unlimited life: If an S-Corp owner becomes disabled or passes away, the S-Corp is able to continue.
- Pass-through taxation: S-Corps don't have the double taxation that C-Corps do because the profits pass through to the shareholders.
- Easier time raising capital: S-Corps can raise additional capital by selling shares of stock.
- Increased credibility: In general, S-Corps are often viewed as a more legitimate business form compared to a partnership or sole proprietorship.
- Lower chance of audit: Normally, other business types have higher risks of being audited. Compared to a sole proprietorship, an S-Corp has a lower chance of an audit.
- Certain tax-deductible expenses: Some business expenses fall into the tax-deductible category.
- Savings on self-employment taxes: Because S-Corp shareholders who also work for the business are employees, they're often able to pay lower self-employment taxes.
It can be time-consuming and tedious to start an S-Corp, but following all requirements is essential. By not adhering to all required guidelines, you run the risk of legal complications, which can be expensive and damaging. To make sure you perform all the necessary actions, you might wish to consult with a tax professional or attorney who specializes in the field for additional guidance.
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