Key Takeaways

  • A North Carolina S Corp is a pass-through entity for federal tax purposes but must still file certain state forms and pay franchise taxes.
  • The corporate tax rate in North Carolina is flat, but S corporations generally do not pay corporate income tax; shareholders report income on personal returns.
  • North Carolina imposes a franchise tax based on the corporation’s net worth, with a minimum of $200.
  • Businesses must file the CD-405 or CD-401S forms and submit by the 15th day of the fourth month after the fiscal year ends.
  • To qualify for S Corp election, a business must first incorporate in North Carolina and then file Form 2553 with the IRS.
  • S Corporations in North Carolina must comply with both state filing and federal IRS regulations, including maintaining eligibility limits such as shareholder restrictions and domestic incorporation.

When filing a North Carolina S-corporation tax return, you will be required to file the forms for informational purposes even though you will not have to pay any corporate taxes since an S-corporation is a pass-through entity. Taxes will be paid at the shareholders' level on their personal tax returns.

North Carolina S-Corporation Taxes

While both corporate and personal income tax rates can vary from state to state, corporate income tax will often fall between 4 percent and 9 percent with personal income running between 0 percent and 9 percent. North Carolina imposes both a corporate income tax and a franchise tax that will most often apply to S and C-corporations. North Carolina corporations pay a flat tax rate of 6.9 percent, though with an S-corporation, the portion of the business income that you receive will be claimed on your personal tax return

In the state of North Carolina, your business tax return is due by the 15th day of the fourth month that follows the end of your fiscal year. For example, if the end of your corporate year is December 31, your tax returns will be due on April 15.

The franchise tax that North Carolina imposes will tax the corporation's net worth. To calculate franchise tax, your corporation will be required to pay whichever of the three options for determining tax yields the largest amount.

  • Tax on capital stock, surplus, and undivided profits
  • 55 percent of the appraised value for all of the corporation's property located in North Carolina
  • The investment in all tangible property located in North Carolina

No matter which situation will apply to you the tax rate will be $1.50 per $1,000 or 0.0015 percent. There is a minimum of $35 if not met by previous calculations and the franchise tax will be due as part of your general corporate return.

North Carolina S Corp Filing Requirements

To operate as a North Carolina S Corp, your business must first be registered as a North Carolina corporation with the Secretary of State. Once incorporated, you can elect S Corporation status by filing IRS Form 2553 to be treated as an S Corporation for federal tax purposes. North Carolina automatically recognizes the federal S election and does not require a separate state-level S election.

However, even as a pass-through entity, the S corporation must file a North Carolina S Corporation Return (Form CD-401S) with the Department of Revenue (NCDOR). This form reports income, deductions, and credits allocated to shareholders. The filing deadline is the 15th day of the fourth month following the end of the fiscal year—typically April 15 for calendar-year filers.

North Carolina S Corps with no taxable income must still file an informational return. Extensions may be requested using Form CD-419 before the original due date. Late filings or underpayment may result in penalties and interest.

North Carolina Franchise Tax Obligations for S Corps

In North Carolina, all S corporations are subject to the state franchise tax, even if no corporate income tax is due. The franchise tax is based on the corporation’s net worth or capital stock, surplus, and undivided profits, whichever produces the highest tax liability.

Key details include:

  • Rate: $1.50 per $1,000 of the tax base (0.15%), with a minimum tax of $200.
  • Tax Base Options:
    1. Net worth (total assets minus total liabilities).
    2. 55% of the appraised value of tangible property located in North Carolina.
    3. The investment in tangible property located in the state.
  • Payment: The franchise tax is due annually as part of the CD-401S return.

Even though the S Corp does not pay corporate income tax, this franchise tax ensures that all registered corporations contribute to state revenue in exchange for the legal protections of incorporation

How to Form an S Corporation in North Carolina

To form a North Carolina S Corp, follow these steps:

  1. Incorporate in North Carolina: File Articles of Incorporation with the North Carolina Secretary of State and pay the applicable filing fee.
  2. Obtain an EIN: Apply for an Employer Identification Number (EIN) through the IRS website.
  3. Elect S Corporation Status: File IRS Form 2553 (Election by a Small Business Corporation) within 2 months and 15 days of incorporation or by March 15 for existing corporations.
  4. Register for State Taxes: Apply for any necessary state tax accounts with the N.C. Department of Revenue, including withholding and sales taxes.
  5. Maintain Compliance: File annual reports, pay franchise taxes, and hold required shareholder and director meetings.

S Corporations are limited to 100 shareholders, must issue only one class of stock, and all shareholders must be U.S. citizens or residents. These requirements must be met to maintain S status.

Five Most Common Forms of North Carolina Business Entities

In the state of North Carolina, there are five primary business entities for owners to choose from, and depending on which one they choose, their taxes will often be affected. The five most common business types include:

  • C-corporations - In North Carolina, C-corporations will be required to pay both the franchise tax and the corporate tax each year. Shareholders will also be required to pay income tax on their distributions on their personal returns.
  • S-corporations - All S-corporations will start off with a C-corporation designation and can then elect the S status by filing forms with the IRS if they meet the eligibility requirements. In general, an S-corporation will not be subject to the federal income tax that C-corporations will be required to pay. Instead, they will function as a pass-through entity where the income will be taxed at the shareholder level, which will eliminate the double taxation that occurs with C-corporations. Even though S-corporations are not required to pay corporate tax, they are required to pay the North Carolina franchise tax.
  • Limited Liability Corporation - LLCs are similar to S-corporations in the fact that they are pass-through entities for taxation. An LLC's individual members will pay federal and state taxes for the income that was disbursed to them from the business on their personal tax return. The company will not have to pay corporate federal income taxes or state franchise tax. LLC's are often treated like partnerships for tax purposes, and single-member LLCs have disregarded entities in the eyes of the IRS. You can also have your LLC designated as a corporation, which will subject the company to state franchise taxes.
  • Partnerships - In a partnership, the income is distributed between partners who are subject to federal income tax on each partner's personal 1040 tax return. Therefore, partnerships are considered pass-through tax entities as well.
  • Sole Proprietorships - When a business is classified as a sole proprietorship, the income tax and business losses pass through to the sole proprietor's personal tax return.

For corporations that operate in multiple states, it is essential to be aware that various states may impose taxes for the property you have in that state or may even consider that location as the "nexus" of your business and therefore subject you to higher or additional taxes. Understanding the laws for each state in which you do business is vital to keep your tax burden from becoming too high.

Tax Forms Required for North Carolina S Corps

North Carolina S Corps must comply with both federal and state filing requirements. Commonly required forms include:

  • CD-401S: North Carolina S Corporation Income Tax Return.
  • D-400 (for shareholders): Used by individual shareholders to report their share of S Corp income on their personal state return.
  • CD-419: Request for Extension for Corporate and Franchise Tax Return.
  • IRS Form 2553: To elect S Corporation status federally.
  • IRS Form 1120-S: Federal income tax return for S corporations.

It’s crucial to submit these forms on time to avoid penalties. North Carolina also requires that S corporations with nonresident shareholders withhold and remit income taxes on the shareholders’ behalf, unless they sign an agreement to file individually.

Advantages and Disadvantages of a North Carolina S Corp

Operating as a North Carolina S Corp provides several benefits:Advantages:

  • Avoids double taxation—income passes directly to shareholders.
  • Allows for limited liability protection similar to a C corporation.
  • May reduce self-employment taxes for shareholders who receive both salary and dividends.
  • Enhances credibility and access to investors.

Disadvantages:

  • Franchise tax still applies even if the business has no income.
  • More complex paperwork than an LLC or sole proprietorship.
  • Restricted ownership rules (limited number of shareholders, one class of stock).
  • Must comply with both federal and state filing obligations each year.

Frequently Asked Questions

1. Does a North Carolina S Corp pay income tax?

No. S Corporations are pass-through entities. Shareholders report their share of income on personal tax returns, but the S Corp must pay the state franchise tax.

2. What is the minimum franchise tax for an S Corp in North Carolina?

The minimum franchise tax is $200, calculated based on the corporation’s net worth or other applicable bases.

3. What tax forms do I file for a North Carolina S Corp?

You must file Form CD-401S with the state and Form 1120-S with the IRS. Shareholders file Form D-400 for their personal returns.

4. Can a North Carolina LLC elect S Corporation status?

Yes. An LLC can elect S Corp status by filing Form 2553 with the IRS, provided it meets the eligibility requirements.

5. When are S Corporation tax returns due in North Carolina?

The filing deadline is the 15th day of the fourth month after the fiscal year ends—typically April 15 for calendar-year entities.

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