How to Start an S Corporation: Everything You Need to Know
Researching how to start an S corporation? Qualified businesses must apply to the Internal Revenue Service (IRS) for approval.3 min read
Researching how to start an S corporation? It's basically a regular corporation with special tax status. Qualified businesses must apply to the Internal Revenue Service (IRS) for approval.
Both C corporations and LLCs can elect S corporation status for tax purposes to save money on payroll taxes. S corporation status also protects shareholders from personal liability from debts and lawsuits. It avoids the double taxation that C corporations have because profits pass through to shareholders. Shareholders then pay taxes on their personal returns.
Steps to Form an S Corporation
If you have not yet formed your company, begin by gathering your shareholders and establishing an office address. Appoint a registered agent who will receive official correspondence for the corporation, and decide on the maximum number of shares you'll issue.
You must also decide in which state you want to form your corporation. Things you need to consider include:
- Where your company's office will be located.
- Where your employees will be working for you.
- The banking location you will use for business accounts.
The next step is to make sure the business name you have chosen is not already registered to another business in your state. You can search the database on your state's Secretary of State website. You will need to file a fictitious business name, or “doing business as” (DBA) if you will be using anything besides your own name. This needs to be registered with your county.
Your business needs to prepare and file Articles of Incorporation with the Secretary of State where you're forming the corporation. This is usually a one-page document with basic information about your company. All of the shareholders need to sign this form before it is submitted with the filing fee your state assesses.
You should write your corporate bylaws, which specify how the corporation will be run. This covers which decisions are the responsibility of the shareholders, how your shareholders will find out about meetings, the number of directors your company will have, and other administrative details. These do not need to be filed with the state but are very helpful in the event your business should ever face litigation. Keep them for your own records.
When your shareholders and board members meet, you are required to keep minutes of all proceedings. This provides permanent documentation of all decisions that are made while a meeting is in progress. Examples of these include board member appointments and officer elections.
Is Your Business Qualified to Be an S Corporation?
In order to become an S corporation, your business must first be formed as a C corporation. This takes place as soon as your Secretary of State accepts the articles of incorporation you have filed. It will then be taxed as a C corporation, which means it will comply with subchapter C of the Internal Revenue Code.
Your business will then need to file Form 2553 with the IRS in order to elect as an S corporation. This must be done within two months and 15 days after the beginning of your business's tax year. You will need to get all of your shareholders to sign the document before filing.
The IRS Form requires the following information:
- Your company's name
- The Employment Identification Number (EIN) or Federal Tax ID number
- The address of your company's principal office
- The state in which your business was incorporated, and the effective date
- Information about the business's shareholders or members
- The dates that comprise your company's fiscal year
Not all companies are eligible to become S corporations. Unqualified businesses include banks, insurance companies, and certain corporations. Also, S corporations can have only one class of stock and 100 or fewer shareholders. These shareholders may not be non-resident aliens.
When you finish filling out Form 2553, send it to the IRS office. The office location depends on the state where your business is registered. After successful filing, the IRS will notify you whether or not your company has been approved as an S corporation.
All of the steps involved in forming an S corporation can be long and complicated, but they are necessary. Doing them improperly will result in loss of your S corporation status and could also make you lose liability protection. In that case, your personal assets may be seized to settle debts and legal rulings against your business.
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