1. Background of an S Corporation
2. Considerations for Your Business Structure
3. Benefits of an S Corporation
4. Filing for S Corporation Status
5. Where to Form Your Corporation

An S Corp business is a business that has elected to be taxed as an S corporation. This means company shareholders, not the company itself, report and are taxed on earned profits.

Background of an S Corporation

Because you have multiple options, choosing the right structure for your business can be difficult. After you've been running your business for some time as a sole proprietor and your business starts to grow, you may decide you need to structure your business to protect your personal assets and to provide tax benefits.

For businesses with the potential for growth, there is almost no better choice than an S Corporation, which is similar to a C corporation in several ways. While both corporation types can last in perpetuity, provide liability protections, and offer opportunities for investment, only S corporations allow you to file your taxes once a year while avoiding double taxation. However, because you may need to personally guarantee loans, S corporations do not provide full limited liability protections. Basically, limited liability means that you can only be held financially responsible for the amount that you invested in your company.

Considerations for Your Business Structure

Forming an S corporation, C corporation, or Limited Liability Company (LLC) will cost you about the same amount. However, there are some differences between these structures that must be considered. For example, shareholders own an S corporation and are required to elect directors. Directors of an S corporation will set a company vision and will also be tasked with overall management of the company. Typically, the directors will delegate day to day operations to managers and officers.

Benefits of an S Corporation

For small businesses, there's almost no more beneficial structure than an S corporation. S corporations are companies that are taxed based on Subchapter S of the IRS Code. The reason so many small businesses structure as an S corporation is the ability to protect shareholders and being taxed more beneficially.

When a business first incorporates, they will be considered a C corporation. If a company does not elect a tax status, the IRS will consider and tax the company as a C corporation.

Shareholders must be careful to abide by the rules of an S corporation to prevent the loss of this beneficial tax status.

Filing for S Corporation Status

After filing for corporate status, you will need to file for S corporation status and follow the rules for this business structure, which include:

  • Limiting your number of individual shareholders to under 100.
  • Using only one stock class.
  • Making sure your shareholders are either resident aliens or United States citizens.

Before you apply for S corporation status, you should be sure that all your shareholders agree to this structure.

When electing S corporation status, your company will need an experienced accountant to help ensure you are following all necessary requirements. If you fail to follow the rules for an S corporation your company will revert to C corporation status, meaning you will be subject to double taxation. After meeting the IRS's requirements, you can elect S corporation status.

S corporations are similar to other corporations in that the personal assets of shareholders will be protected from debts incurred by the company. Form 1120S is used to report S corporation earnings to the IRS.

Where to Form Your Corporation

When forming your corporations, you can do so either in the state where your business will be located or in Delaware, which is one of the most business-friendly states in the entire country. Forming in your own state is significantly less complicated, particularly if it is the only state where you intend to do business.

For instance, incorporating in your home state is typically more affordable as you won't need to pay for franchise taxes. Also, since you will only need to file annual reports in one state, the amount of official paperwork you will need to handle will be much less. However, it's rare for a company to only do business one state. Most companies operate both across the United States and internationally.

If your S corporation business has locations in many states, you can choose to form your company in one state and then register to do business in additional states. This will require you to register your company, pay fees, and file annual reports in every state where your business operates.

If you need help forming an S Corp business, you can post your legal needs 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.