S Corporation Requirements List: Everything You Need to Know
An S-corp requirements list is an important item for those seeking to create an S corporation.3 min read
2. How to Start and Form an S Corporation
3. What Is Pass-Through Taxation?
4. Taxation of an S Corporation
An S-corp requirements list is an important item for those seeking to create an S corporation. After incorporation, business owners might want to obtain an S corporation status to avail its advantages, especially when it comes to taxation. Here's a look at all the requirements needed in filing for an S corporation status.
S corporation is a tax status, with the term taken from Subchapter S of the Internal Revenue Services (IRS) code. A major advantage of having an S corporation status is that profits and losses are passed through to shareholders. This means that S corporations are not subjected to double taxation since taxes are settled on the personal level of the shareholders and not on the corporate level. An S corporation is a corporation for its legal and liability terms, but a partnership when it comes to taxation.
Apart from that, an S corporation works similar to a C corporation. It has directors, officers, and shareholders who work in the same manner as those of a C-corp. Some exceptions differentiate an S corporation from other business types. Among these restrictions:
- The number of shareholders should be below 100.
- Shareholders need to be U.S. citizens or residents.
- The corporation can only issue one class of stock.
An S corporation also provides limited liability to its shareholders because it is simply a corporation that is a separate entity from its shareholders. With this limited liability, all the personal assets of the shareholders, such as bank accounts and properties, cannot be used to satisfy any business liabilities.
How to Start and Form an S Corporation
To help you in starting an S corporation, here's a step-by-step guide to use in preparing all the needed requirements.
- First, you should settle on a legal name for your corporation. Some secretary of states are involved in the process of reserving and ensuring that legal names are appropriate and unique.
- The articles of incorporation need to be drafted and submitted to the secretary of state in the area in which you are incorporating.
- If you already have initial shareholders, you are required to issue a stock certificate to each of them.
- File and apply for business licenses and the needed certificates that are specific to your industry.
- Get an Employer Identification Number by submitting Form SS-4 or completing an online application on the Internal Revenue Service (IRS) website.
- The business is required to settle payroll, unemployment, and disability taxes; these usually need additional tax numbers. It is best to apply for those identification numbers required by government agencies.
- For the business to get an S corporation status, file IRS Form 2253 not later than 75 days after the formation of the corporation.
What Is Pass-Through Taxation?
Pass-through taxation is one of the advantages of having an S corporation. If the corporation is eligible, an S corporation status can be earned by submitting a form to the IRS. Shareholders of an S corporation will report their share of profit or losses in the company on their individual tax returns and pay taxes at the individual rate. To report income, S corporations file IRS Form 1120S.
Taxation of an S Corporation
In general, an S corporation is not paying income taxes on the corporate level. As per the IRS, an S corporation is exempted from federal income tax, other than those on some capital gains and passive income. An S corporation passes-through profits (and sometimes losses) to the shareholders. These profits are filed and taxed at the shareholders' individual tax rates when they file Form 1040. The pass-through concept (also tagged as flow-through) means that the corporation is only taxed once, on the individual level of the shareholders.
In this way, S corporations can avoid "double taxation." S corporations also have the capacity to retain their net income that can be used as operating capital. But these profits will be considered as if it were distributed to the shareholders. This will eventually mean that shareholders may pay taxes for income that they never really received. This differs from a C corporation in which shareholders are only taxed if the dividends were actually paid out.
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