Key Takeaways

  • A North Carolina S corp provides liability protection and pass-through taxation benefits for shareholders.
  • S corps must first form a standard corporation and then file IRS Form 2553 to elect S corp status.
  • North Carolina S corps are subject to both federal and state tax rules, including franchise tax and annual reporting obligations.
  • Common formation steps include filing articles of incorporation, appointing directors, issuing stock, and drafting bylaws.
  • Limitations include shareholder restrictions and potential taxation of shareholder fringe benefits.

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's 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.

North Carolina S Corp Taxation Overview

North Carolina S corporations are not taxed at the federal corporate level. Instead, they benefit from pass-through taxation, meaning income, deductions, and credits are passed directly to shareholders, who report them on their personal tax returns. However, S corps in North Carolina may still be subject to state-level obligations:

  • Franchise Tax: North Carolina imposes a franchise tax on S corps, calculated based on the company’s net worth or capital stock. The minimum franchise tax is currently $200.
  • Annual Reports: S corps must file an annual report with the North Carolina Secretary of State and pay a $25 fee if filed online or $30 by paper.
  • Form CD-401S: S corps doing business in North Carolina must file this state-specific income tax return, even if no income is earned or if all income is allocated to shareholders​.
  • Withholding Requirements: If the S corp has nonresident shareholders, it must withhold and remit state income tax on behalf of those individuals.

For current forms and detailed instructions, refer to the North Carolina Department of Revenue’s corporate tax page​.

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.

S Corporation Election Process

After successfully forming a North Carolina corporation, the next step in becoming an S corporation is to make a timely election with the IRS:

  1. File IRS Form 2553: This form must be submitted within 2 months and 15 days after the beginning of the tax year the election is to take effect.
  2. North Carolina Conformity: North Carolina automatically conforms to the federal S corp election. No separate state election is necessary.
  3. Maintain Eligibility: Ensure the corporation maintains eligibility by having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and only one class of stock.

Failure to meet or maintain these requirements could cause the S election to be terminated.

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.

Is a North Carolina S Corp Right for You?

Choosing a North Carolina S corp may be ideal for business owners seeking tax advantages while maintaining a formal structure. However, it isn’t suitable for every business. Consider these additional factors:

  • Ideal for Small Businesses: Particularly beneficial for service-based businesses and professional practices.
  • Not Suitable for High Growth Startups: Venture capitalists often prefer C corporations due to investment structure preferences.
  • Employee-Owners Tax Consideration: Owner-employees must pay themselves a reasonable salary, which is subject to employment taxes, but remaining profits may be distributed as dividends not subject to self-employment tax.

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.

Maintaining Good Standing for a North Carolina S Corp

To keep your North Carolina S corp in compliance and good standing:

  • Annual Report Filing: File with the Secretary of State on or before the 15th day of the fourth month following the end of the fiscal year.
  • Registered Agent: Maintain an up-to-date registered agent and address on file.
  • Franchise Tax Payment: Ensure timely payment of the North Carolina franchise tax to avoid penalties or dissolution.
  • Corporate Records: Keep accurate records including meeting minutes, bylaws, and stock issuance logs.
  • Renew Licenses: Renew local and state business licenses as required depending on your industry.

Failure to adhere to these obligations may result in administrative dissolution or loss of S corp status.

Frequently Asked Questions

  1. Do I need to file anything with North Carolina to be an S corp?
    No, North Carolina automatically recognizes the federal S corp election; no separate state-level S election is required.
  2. What taxes do North Carolina S corps pay?
    S corps do not pay federal income tax but must file a state corporate return and pay franchise tax.
  3. How much does it cost to form an S corp in North Carolina?
    Filing articles of incorporation costs $125. Additional costs may include registered agent services, licenses, and legal assistance.
  4. Can an LLC become an S corp in North Carolina?
    Yes, an LLC can elect to be taxed as an S corp by filing Form 2553 with the IRS, provided it meets all eligibility requirements.
  5. What happens if I don’t file an annual report?
    Failure to file may result in penalties or administrative dissolution by the Secretary of State.

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