How to start S corp is a topic that many entrepreneurs are interested in due to the various advantages associated with the establishment of an S corporation over other entities, such as C corporations and LLCs. Here is some information about how to start an S corporation.

What Is An S Corporation?

An S corporation is identical to an ordinary corporation except that it has chosen to be taxed under subchapter S of the Internal Revenue Code.

Originally, the purpose of the S corporation was to bridge the gap between corporate form and partnership form for small and domestic corporations. The corporate form eliminates personal liability for members. However, the two levels of taxation is a disadvantage of the corporate form. The partnership form offers a tax structure that is far more efficient. However, there needs to be at least one member who is fully exposed to liability in the partnership form.

To start an S corporation, you need to establish a corporation. This corporation needs to qualify to be taxed under subchapter S based on IRS rules. The corporation can then apply for status as an S corporation. The IRS regularly approves applications for corporations that are qualified.

Corporations are not the only entities that can be taxed as S corporations. As long as they qualify, limited liability companies are also able to be taxed as S corporations.

An S corporation offers protection for owners against personal liability. It also allows the owners to pay the income taxes of the corporation based on their individual tax returns. This eliminates the double-taxation that C corporations often experience.

Eligibility Requirements

There are several conditions that S corporations have to follow. These conditions have been established by the IRS. Some of the conditions are as follows:

  • The number of shareholders that an S corporation has must be 100 or below.
  • A S corporation can only issue a single class of stock
  • None of a S corporation's shareholders can be non-resident aliens.
  • Corporations and partnerships cannot be the shareholders of an S corporation.
  • The S corporation is not permitted to participate in specific lines of business, such as providing certain financial services or insurance.

If you've already established a corporation but the corporation doesn't meet the requirements to gain status as an S corporation, it will be necessary to restructure the corporation.

Filing Articles of Incorporation

If you haven't established your corporation yet, you should select a principal office address and shareholders. You also need to appoint a registered agent who will be responsible for receiving official notices for your corporation. Then, you need to determine the maximum number of shares that your corporation will be permitted to issue.

The next step is obtaining the articles of incorporation form. You can get this form from the secretary of state of the state in which the corporation will be based. Follow the instructions accompanying the form to fill it out and file it.

Usually, the articles of incorporation is a one-page document. The information required will differ from state to state.

The shareholders will need to sign the articles of incorporation. Then, the articles of incorporation can be sent to the secretary of state. You will need to file the articles of incorporation with the required filing fee.

After you file the articles of incorporation, you will need to write a draft of the corporate bylaws. The corporate bylaws will describe how your corporation will be governed. The corporate bylaws should specify what corporate decisions the shareholders will be able to make, how shareholders will learn of meetings, and how many directors the company will have.

It is not necessary to file the corporate bylaws with the state officials. However, the corporate bylaws may be important if your corporation faces litigation.

Your corporation will be "born" as soon as the articles of incorporation are filed with the secretary of state. The corporation will be classified as a C corporation by the IRS. If you want to switch to S classification, you will need to file Form 2553, which is a one-page document. You won't need to pay a filing fee and you will need to file the form with the IRS.

If you need help with how to start 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.