Key Takeaways:

  • Avoidance of Double Taxation: S Corporations allow profits and losses to pass through to shareholders' personal tax returns, avoiding corporate taxes.
  • Liability Protection: Shareholders' personal assets are protected from the corporation's liabilities.
  • State-Specific Requirements: Each state has unique steps for S Corp registration, including possible additional filings and fees.
  • Ongoing Compliance: To maintain S Corp status, annual meetings, detailed minutes, and adherence to shareholder limits are required.
  • Shareholder and Stock Limitations: S Corps are limited to 100 shareholders and must issue only one class of stock.

S corp registration is an election made through the Internal Revenue Service to be considered for S corporation status. If the election is approved, the corporation is treated as a pass-through entity for federal tax purposes.

Overview of an S Corporation

As a small business begins to grow and enjoy success, the tax rate grows along with it. As a company experiences this growth and expansion, owners may consider forming an S corporation, or S Corp.

The advantage of an S corporation is the tax advantages it offers while preserving ownership flexibility.

To create an S corporation requires the owner(s) to file a set of Articles of Incorporation with the Secretary of State where the business will be located.

An S corporation functions in the same way as a C corporation in that the corporation does issue stock and it is governed like a corporation with officers, shareholders, and directors.

When it comes to protections, the shareholders (owners) are treated to the same liability protection afforded to shareholders in a C corporation. S corporation shareholders' personal bank accounts or personal assets cannot be seized to use as payment for business liabilities.

A partnership or sole proprietorship passes through the majority of its business income and losses to its shareholders. So, too, does an S corp.

With a regular corporation, there is taxation at the corporate and individual level. This is referred to as double taxation. With an S corporation, this double taxation does not occur. When filing, the individual tax rate is used on the income or losses passed through to the shareholder(s).

To keep S corporation status, the corporation must maintain the following:

  • The company is required to be a domestic corporation.
  • The corporation can only have 100 shareholders or fewer.
  • Only those eligible to be shareholders can be part of the S corporation.
  • Only one class of stock can be available through the S corporation.

Benefits of Registering as an S Corporation

Registering as an S Corporation offers numerous advantages, particularly for small businesses looking to balance tax benefits with legal protections. One of the most significant benefits is the avoidance of double taxation. Unlike C Corporations, S Corporations allow income, deductions, and tax credits to pass through directly to shareholders, who report this income on their personal tax returns. This pass-through taxation model can result in substantial tax savings, especially for businesses in their growth stages. Additionally, S Corporations offer liability protection, similar to C Corporations, where the personal assets of shareholders are generally protected from business debts and liabilities. Another advantage includes the ability to split income among family members, which can further reduce overall tax liability.

Steps to Register an S Corporation

Before starting the steps, you must determine which state will be the base point where the business is to be incorporated. Several things to consider include:

  • The physical location of the business.
  • The location where employees will be hired.
  • Which location will be responsible for the company's bank accounts.
  • The states the company will be doing business with.

State-Specific Registration Requirements

When registering an S Corporation, it's important to understand that requirements vary by state. While the general process is consistent, including the filing of Articles of Incorporation and obtaining an Employer Identification Number (EIN), states may have additional steps such as publishing a notice of incorporation or creating an operating agreement. Furthermore, some states require annual reports and fees to maintain S Corporation status. It's crucial to check with your state's Secretary of State office to ensure compliance with all state-specific regulations.

Registering 

Step 1. Business Name

Check with the Secretary of State (SOS) website for your area to determine if the business name you've chosen is actually available. Use the search option on the SOS website.

The name of the company should stand out from other businesses so there is little to no confusion. For those who already have a business name, once it is created as an S corporation, the addition of "Inc." or "Incorporated" will be added to the end of the name.

For business names other than an owner's actual name, a fictitious business name, also called a "DBA" or "doing business as," must be filed with the applicable county.

Step 2. Articles of Incorporation

Articles of incorporation are created and filed in the state in which the S corporation is to be formed. The articles are filed with the SOS.

It is standard for many businesses to choose their home state to incorporate a business. This provides the convenience of not having to make payments and file reports in multiple states.

For those businesses that have a national network, it is possible to incorporate in a business-friendly state such as Delaware and then register in additional states as needed to do business.

In the articles, include the name of the business plus either incorporated, corporation, company, or limited, or an abbreviation of one of these words.

State the number of shares of stock the corporation can issue.

Include the name and address of the registered agent and the names and addresses of the incorporators.

File the articles with the SOS and pay the applicable filing fee.

Step 3. Additional Steps

Prepare the bylaws that summarize the rules and operating procedures for the corporation. These are not required but recommended to have in your files.

Keep thorough corporate minutes of all meetings with the board and the shareholders.

Apply to the Internal Revenue Service for an Employer Identification Number (EIN).

Verify with the state if there are any state or local permits required to operate the business.

Maintaining S Corporation Status

After successfully registering as an S Corporation, maintaining your status requires adherence to several ongoing requirements. These include holding annual shareholder meetings, keeping detailed minutes, and filing annual reports with the state. It's also essential to ensure that the corporation does not exceed 100 shareholders, all of whom must be eligible U.S. citizens or residents. The corporation must also issue only one class of stock. Failure to comply with these regulations can result in the IRS revoking the S Corporation status, potentially leading to increased taxation as a C Corporation.

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