S Corporation Filing: Everything You Need to Know
S corporation filing requires you to submit Form 2553 to the IRS. 3 min read
S Corporation Filing
S corporation filing requires you to submit Form 2553 to the IRS. You may need to consider an S corp as your small business grows, and an S corps offers a variety of tax advantages to help you save money. Growing companies tend to face certain complexities when tax season arrives, which is why an S corp may be the solution to your problems.
S corps were created by Congress in 1958 to help small businesses bypass double taxation. Overall, an S corp retains the structure of a corporation but retains ownership flexibilities. In essence, it is a corporation with a pass-through taxation method, where losses and profits flow from the business to individual shareholders to file on their personal tax returns.
However, the S corp still should file an information-based income tax return every year, including other forms that the IRS may require. Unlike corps, the S corp does not pay business taxes. Rather, an S corp gets special treatment for tax reasons that favor business owners.
In addition, the S corp gives you certain flexibilities in the managerial status of your company.
S Corp Advantages
S corps offer a variety of other benefits, such as:
- Asset Protections: S corps give you various legal safeguards that protect your personal assets. For instance, shareholders cannot be held liable for liabilities and debts that a business incurs. In addition, creditors cannot petition the courts for your personal property to satisfy business debts.
- Income Characterization: An S corp allows you to classify your income. For example, shareholders who perform other duties for the business may also classify themselves as employees and receive a salary while still receiving dividends or tax-free distributions. Doing so allows you to save on self-employment taxes. With that, the compensation must be considered reasonable, which means the salary must match the same position outside of your business.
- Ownership Transfer: If you want to transfer shares to another person, you can do so without facing tax ramifications or corporate termination. Moreover, an ownership transfer does not mandate property basis adjustments or adhere to complex accounting measures.
S Corp Restrictions
S corps offer many advantages, but you should also be aware of the drawbacks:
- Ownership Restrictions: S corps do not have the same level of ownership flexibilities as C corps or LLCs.
- Wage/Dividend Cautions: A great part of an S corp is a flexible structure when it comes to designating dividends and wages, but this may also pose a problem. The IRS tends to scrutinize income characterization due to the potential for abuse. As a result, you can get an IRS response if you make a mistake in characterizing your income.
- Tax Mistakes: Mistakes occur, but it could lead to revocation of your S corp in certain cases, and though such an occurrence is rare, it can happen. You could make mistakes in areas regarding notification, consent, election, stock ownership, and other managerial aspects of the business.
- Stock Restrictions: Only one type of stock is allowed (No tiered stock permitted).
Creating a Corporation
To create your business, you must first determine the following factors:
- Physical address
- Whether you intend to hire employees
- Bank where you will open a business account
- States where you intend to operate
After, you must check to see if your business is available in the state where you intend to register it. Make sure that no other business is using the name you have in mind, and change the name if it sounds too similar to another business to avoid confusion.
The name should be fictitious in nature and separated from your personal name. Once you register the name, prepare your articles of incorporation, and ensure that you include bylaws. In addition to bylaws, remember that you must conduct meetings and record the meetings for a certain number of minutes. When finished, submit your incorporation document to the secretary of state office of your state.
Then, you must get an Employer Identification Number (EIN). You can get an EIN online for free, and the process only takes minutes. Further, you need various local and state permits based on your profession.
To learn more about S corporation filing, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys have graduated from some of the most prestigious laws schools in the nation and will use their experience in all matters pertaining to S corp registration and what you can do to maintain your corporate entity. Also, they will guide you every step of the way if you have never started a business before.