S Corp Requirements: Everything You Need to Know
S corp requirements can be a simple process if you know the right steps.5 min read
2. Advantages of an S Corp
3. S corporations provide a wide array of benefits in the form of:
4. Disadvantages of an S Corp
5. Forfeiting Liability
6. Starting an S Corp
7. Location of Incorporation
8. Cost Factor
9. Corporate Structure
10. S Corps and Registered Agents
12. Tax Documentation
13. Schedule K
S Corp Requirements
S corp requirements can be a simple process if you know the right steps. S corps provide a wide array of growth and opportunities while offering the protections of a Limited Liability Company (LLC). First, you must establish an Articles of Incorporation document and file it with your Secretary of State. The S classification allows members to dispense stock, and the owners, also known as shareholders, are afforded the same liability protections as C status corporations. For example, personal assets of members cannot be seized from any judgments or creditor claims. General partnerships and sole proprietorships cannot classify under an S corporation and are legally responsible for debts and liabilities, rendering the personal assets vulnerable to seizure.
Further, S corps are not subject to double taxation, and S classifications only have to submit taxes annually. Each corporation is designated as C classification until members reclassify into S status. To satisfy requirement for an S corp. you must:
- Have less than 100 shareholders
- Shareholders must be people and not entities
- Undertake one version of a stock
- Be under the ownership of residents or U.S. citizens
S corporations are not double taxed because of pass-through taxation. Pass-through taxation allows profits and losses to flow from the business to individual members who then file gains and losses on personal tax returns. S corporations are not taxed as an entity. The only form of taxation occurs when dividends or losses on their personal salaries are paid to members. S corporations could save hundreds of thousands of dollars using the pass-through method.
If you choose the S model, hire an account to avoid mistakes that could revert into C status. With that, the process of becoming an S corporation is not as cumbersome or expensive as you may have been led to believe.
Advantages of an S Corp
S corporations provide a wide array of benefits in the form of:
- Limited liability protections of personal assets
- Attracting investors by offering stock
- The entity exists in perpetuity, even if members leave or die
- Filing taxes annually
- Transfer of ownership
Additionally, S corporation shareholders have the option of becoming employees that take a salaries. Further, they can also take dividends from the corporation. Dividends comprise a piece of the company’s earnings are distributed to shareholders.
Members can also receive distributions, which comprise dividends or salaries that can reduce that amount of self-employment taxes a member may owe. An S corporation helps a new business garner credibility with the public because many people view corporations as stable and legitimate.
Disadvantages of an S Corp
While the advantages outweigh the disadvantages, you should be aware of the potential drawbacks and risks involved in setting up an S corporation.
- Ongoing fees in the form of franchise taxes and annual reports
- Mistakes could result in dissolution of your S status
- The IRS scrutinizes S corp. tax returns more closely
- Inability to shuffle losses or income to certain shareholders due to the one-stock restriction
- Adjustment accounts can be hard to manage, which requires the input of a professional
Also, consult an attorney regarding any questions you may have to avoid legal complications
Members risk giving up their limited liability protections under an S corporation, known as “disregarding the corporation form.” This occurs when members mix personal and corporate funds, or they could make vital decisions without consultation of board members. As a result, creditors could petition to hold members responsible for company decision, otherwise called “piercing the corporate veil.” The corporate veil strategy could also be applied if a corporation loses its status due to such factors as failing to pay fees, taxes or meet filing requirements. To maintain your corporate veil, you may also hire companies to file documents and obtaining the necessary forms.
Starting an S Corp
To start an S corp., you must first choose a name and reserve it if it is available. Further, create an Articles of Incorporation document with the Secretary of State office. Afterward, dispense the necessary stock to shareholders. Further, apply for any licenses or permits you may need to conduct business. You can use Form SS-4, you may apply on the IRS website to get an Employer Identification Number (EIN).
Location of Incorporation
Most businesses choose to incorporate in the state where intend to conduct business or in Delaware. Delaware is known for its business-friendly laws and courts to accommodate the needs of corporations. With that, incorporating in the state where you live has a number of advantages, such as:
- Few legal restrictions
- Not paying taxes and filing annual reports in other states
- Less costly
Many corporations choose to operate nationally and overseas. If you need to incorporate in multiples states, register in your home state first and register in other states as necessary. Regardless of where you register, you must pay fees and file reports on an annual basis. Failure to meet such standards could result in your business being disbanded.
In addition to paying the necessary fines, you must conduct annual meetings among shareholders, and you must recorded the minutes of the meeting. Recording minutes indicates management changes and other vital corporate operations. Many states have this requirement.
First, corporations are governed by shareholders. The shareholders appoint directors who establish visions and goals for the organization. Directors then hire officers to establish the vision of the company. In addition, officers manage everyday operations of the business.
S Corps and Registered Agents
Certain states may require you to establish a registered address in the state where you conduct business. The person or company at this address is called a registered agent. A registered agent is an appointed representative that receives or sends official documents on a company’s behalf. In addition, that agent can remind members to pay fees or file annual reports. Registered agents must be available during each business hour.
If an entity begins as an LLC, the operating agreement must be rewritten to reflect the status of the new corporation. An operating agreement is a document outlining the internal structure of your business. Consult a professional if you need help amending your operating agreement. You should have your operating agreement reviewed and modified BEFORE making the election with the IRS.
The information required on Schedule B mainly includes:
A Schedule B form will ask you the following:
- Others forms of stock a corporation may own in another company
- Details on ownership interest in partnerships
- Total receipts of their year amounted to less than a set figure
- Corporation’s assets were recorded less than a set amount near the end of a certain year
If total assets at the end of the year amount to less than the set figure, that business does not need to submit Schedules L, M-1 Reconciliation of Income and other documents.
While operating your business, ensure each detail of your operations are recorded thoroughly corporation must file a basic summary of business activity, such as:
- Pass-through methods.
You need to report the aforementioned information on Schedule K with Form 1120S.
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