How To Start an S Corp: Everything You Need to Know
How to start an S corp is a question that many business owners who are interested in incorporating want to know. 3 min read
How to start an S corp is a question that many business owners who are interested in incorporating want to know.
Subchapter S corporations, also referred to as S corporations, were originally created to bridge the gap between corporate form and partnership form for domestic and small corporations. The corporate form is advantageous in that it protects the members from personal liability. However, the disadvantage of the corporate form is that it possesses two levels of taxation. The advantage of the partnership form is that it offers a tax structure that is more efficient. However, the disadvantage of the partnership is that it requires at least one owner to have full liability exposure.
What Is an S Corporation?
Like a C corporation, an S corporation offers owners protection against any personal liability. Another advantage of the S corporation is that it permits the shareholders to pay taxes on the income of the S corporation on their individual tax returns. S corporations are not taxed at the corporate level. Therefore, while C corporations experience double taxation, S corporations are able to avoid this double taxation.
Pass-through taxation and liability taxation are the main advantages of S corporations. Unfortunately, S corporations also have four major rules that need to be followed. If these four major rules are not followed, the Subchapter S tax status of the S corporation will be terminated. The four major rules are as follows:
- The corporation needs to be domestic.
- The corporation cannot have more than 100 owners or shareholders.
- Only eligible shareholders can be included in the corporation.
- The corporation can only have a single stock class.
The Subchapter S election is automatically void if any of these four requirements are not satisfied at any time. Your corporation will return to the tax structure of a C corporation, which is considered by most to be less favorable.
S corporations enjoy pass-through taxation. This means that S corporations do not pay income taxes on the business level. Instead, S corporations simply need to file a tax return for informational purposes. However, the income and loss of the business are reported on the personal tax returns of the owners and shareholders. Therefore, any income taxes that are due are paid at the individual level. This is how S corporations manage to avoid double taxation.
Creating a Corporation
In order to incorporate your business, you will first need to decide in which state you will establish your corporation. Some things that you should consider include:
- Where you will hire your employees
- Where you will keep the business bank accounts
- Where the physical location of the business will be
- Which states you will be doing business
You should ensure that your business name is available in the state you choose to incorporate in. You can choose a name besides your legal name to be the name of your business. However, you will need to file a DBA or "doing business as" with your county to file a business name that is fictitious.
You should draft the articles of incorporation and file it with your state's secretary. Draft the corporate bylaws in order to summarize the rules of the company relating to duties, operations, and officer positions.
In certain states, the corporate bylaws are not required. However, it is recommended that you draft and maintain the bylaws for your personal records.
You should keep corporate minutes of all shareholder and board meetings. The minutes will permit you to formalize and record the decisions that you make during your meetings. These decisions can include important resolutions like the appointment of officers and board members.
You should prepare and submit the IRS Form SS-4 in order to apply for the Employer Identification Number or the EIN for your corporation. You can apply online, over the phone, or by mail to get an EIN.
Depending on the type of corporation you are establishing, you may need to apply for both local and state permits in order to legally operate.
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