1. Creating an S Corporation: Start By Incorporating
2. Filing Form 2553

Updated November 27, 2020:

How to set up an S corp properly involves a few steps, such as incorporating your business, selecting the right number and type of shareholders, and filing appropriate forms with government agencies.

An S corporation isn't really a separate business entity. Instead, it's basically a corporation that's applied for S corp status for tax purposes. For example, an LLC can choose S corp status to enjoy payroll tax savings.

S corporations were created as a way to bridge the gap between small, domestic corporations and corporations. This includes benefits such as liability protection and an efficient tax structure. Another advantage is avoiding double taxation.

Creating an S Corporation: Start By Incorporating

If you're not already operating as a corporation, you'll have to begin by choosing shareholders and a principal office location. You must also choose a registered agent and identify the maximum number of shares your business can issue.

Prepare an Articles of Incorporation. This is typically a one-page document. The required information to include in it may differ slightly from one state to another. Your shareholders should sign the Articles. You'll submit it to your Secretary of State office, along with the necessary filing fees. 

You must file your Articles in the state where you wish to set up your S corp. Every state may have its own particulars for the process, but they usually have similar procedures to follow.

Most business owners choose to incorporate in their home state. This is easier and more convenient than filing reports and making payments across multiple jurisdictions. If you conduct business in several states, you might want to incorporate in a state like Delaware, which is known for being business-friendly. Then you can register to do business in other states as needed.

You should draft a set of corporate bylaws that details how your corporation will be governed. Bylaws should outline important information, such as the following: 

  • How to notify shareholders of meetings 
  • Which corporate decisions will be made by the shareholders 
  • The number of directors the corporation will appoint 
  • Similar governance issues

To update the bylaws and transfer stock requires formal documentation and procedures. While you don't have to file your bylaws with the state, they may become vitally important in case of future litigation. Some states don't require you to have corporate bylaws, but it's still recommended to have them for your own records.

Corporations must have a leadership team. They also have to hold regular director and shareholder meetings. You must keep minutes from these meetings and file them with your corporate records. Minutes let you record and formalize decisions that are made in your meetings. This may include passing resolutions and appointing officers and/or board members.

Obtain an Employer Identification Number (EIN) from the IRS. This is free to do.

You might need certain local or state permits to operate your business legally, depending on the type of corporation you're forming.

Filing Form 2553

The most important part of your S corp election — and the step that actually makes the election — is filing Form 2553, also known as the "Election By a Small Business Corporation," with the IRS. You don't have to pay any filing fees. 

Once your Articles of Incorporation is approved, you're officially running a corporation, which the IRS classifies as a C corp.

To be considered an S corp, you must file Form 2553 within 75 days of the start of your corporation or within 75 days of a new year. There are timeline restrictions to adhere to. If you miss a deadline, you can ask for a late election if you show a valid reason for not filing on time.

On Form 2553, you'll indicate which tax year you want to operate under. You'll also need all of your corporation's shareholder signatures. Submit the form to the correct office based on your business's principal location. As long as you submit the appropriate paperwork, you'll likely be approved for S corp status for state income tax purposes. 

Setting up an S corp is more complex than setting up an LLC, but it's important to follow all necessary procedures. If the process is confusing or overwhelming, you might want to consult with an experienced attorney or incorporation service to help you.

If you need help setting up an S corp, 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.