North Carolina S Corporation: Everything You Need to Know
A North Carolina S corporation is a business entity that offers limited liability and a formal structure for businesses in North Carolina.3 min read
North Carolina S Corporations
Taxed under the Subchapter S in the Internal Revenue Code, an S corporation is separate from the corporation's owners and stockholders. In North Carolina incorporation law, there's no distinction between an S or C corporation.
Those who want limited liability and a more formal structure can opt for a North Carolina S corporation. This corporation is a standard corporation that becomes an S corporation when its shareholders choose special tax status with the IRS. It files IRS Form 2553 after filing official documents with the state.
How to Form a Corporation in North Carolina
To create a North Carolina corporation, you must follow a few steps:
- Select a corporate name. The name must end with one of these terms or its abbreviations: Company, Corporation, Incorporated, or Limited. Check the North Carolina Secretary of State business name database to make sure the name isn't already on file.
- File articles of incorporation. Once you file with the North Carolina Secretary of State, your corporation is official.
- Designate a registered agent. Every corporation in North Carolina must have an agent, and this is either an individual or corporation that accepts legal documents on the corporation's behalf. The registered agent must have a physical street address in the state.
- Create corporate bylaws. The bylaws establish basic ground rules for operation. However, you don't need to file the bylaws with the state.
- Assign initial corporate directors. Whoever signed the articles is the incorporator, and this person appoints initial corporate directors who serve on the board until the shareholders have the first meeting.
- Conduct your first board of directors meeting. At this meeting, directors appoint officers, adopt bylaws, authorize shares of stock, and adopt an official stock certificate. If you plan on having an S corporation, the directors should approve the selection of S corporation status.
- Issue stock. Each shareholder receives stock, which has the shareholder's name and contact information.
- Know the annual report requirements for North Carolina. Corporations in the state must file an annual report with the North Carolina Secretary of State.
- Adhere to tax and regulatory requirements. Make sure you follow up on other monetary requirements of your corporation. You may need to obtain a federal employer identification number (EIN), submit Form 2553 Election by a Small Business Corporation for S corporation filing, and obtain business licenses.
- Register with the North Carolina Secretary of State. If you organize your corporation outside of the state, you must register with the office and file an Application for Certificate of Authority.
Pros and Cons of North Carolina S Corporation
There are several advantages to establishing a North Carolina S corporation, some of which include the following:
- The life of a corporation is independent and continues to operate regardless of the death of a stockholder.
- The sale, purchase, or gifting of stock allows for ownership changes without disturbing the ability to conduct business.
- The S corporation doesn't pay income tax, and its income or loss goes directly through the stockholders.
- The annual meetings can give a comprehensive guide for management to follow.
On the other hand, there are several disadvantages, some of which include the following:
- Disagreements among stockholders can inhibit decisions.
- Bylaws may prevent minority stockholders from recovering the value of their investment.
- Employment benefits are taxable incomes to stockholder employees that possess two or more percent of stocks.
- Corporation-paid benefits for stockholders can become costly.
C Corporation and S Corporation Differences and Similarities
There are several key differences between a C and S corporation. Pertaining to a corporate tax return, a C corporation must declare profits and losses. It also pays taxes on profits, and its shareholders pay income taxes on what the corporation pays them.
On the other hand, an S corporation files a K-1 tax return but doesn't pay income tax. As a result, the shareholders declare their share of profits on their own tax returns.
On the other hand, both C and S corporations are legal entities and begin when you file articles of incorporation or a certificate of incorporation. Shareholders make up and are owners of both types of corporations, and these people make the major management decisions. The corporations also provide limited liability protection for shareholders, so the shareholders aren't responsible for obligations to the corporation.
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