S corporation formation entails submitting Form 2553 after you register your corporation with state authorities. An S corp is an ordinary corporation with an S tax classification. S corps provide certain limited protections to shareholders in the same manner as C corps, separating the owners from the business and protecting them from the debts and liabilities of the business.

S corps were also designed to give smaller businesses additional tax flexibilities.

S Corp Advantages

S corps provide a variety of advantages to small business owners, and many owners register a corporate entity and immediately elect an S classification to obtain the pass-through method. Other advantages include:

• **Liability Protection: Owners cannot be held liable for business debts/liabilities, and creditors cannot go after personal assets in the form of houses or cars.

• **Ownership Transfer: Owners can transfer stock freely with minimal restrictions.

• **Unlimited Lifespan: The lifespan of an S corp exists in perpetuity, regardless of what happens to members.

• **Pass-through Taxation: S corps avoid double taxation by allowing profits and losses to pass from the business to individual shareholders. Shareholders would record profits and losses on their individual tax returns, thus avoiding paying business income taxes.

• **Raising Money: S corps allow owners to sell stock shares to raise capital.

• **Heightened Credibility: The public views S corps as more legitimate than general partnerships and sole proprietorships.

• **Profit Distributions: Under IRS guidelines, items in the form of losses, profits, and other items are dispensed to shareholders based on their stock share.

• **Low Auditing Risk: S corps tend to be audited less than other entities, such as sole proprietorships.

A key advantage of an S corp lies in how shareholders may classify themselves. S corp shareholders may also classify themselves as employees if they actively work in the business, allowing them to save on self-employment taxes. Under an employee classification, the business must withhold self-employment taxes in the form of Social Security and Medicare taxes.

With that, profit distributions to shareholders are not open to such taxes. Therefore, the more revenue that a shareholder/employee receives, the less self-employment taxes that the shareholder would have to pay. It’s worth noting that the IRS scrutinizes employee classification due to the potential for abuse. This is why you should work under a reasonable salary to avoid a response from the IRS.

Corporate Registration

When it comes to creating a corporation, you first need to incorporate the entity. You need to consider such factors as:

• Physical presence of the business

• Location of hiring employees

• Business banking accounts

• Place of business operation

When you establish the aforementioned principles, you should also conduct the following steps:

• Ensure that your new name is available within your respective state. You may search the Secretary of State website to find out if your name is already taken.

• You should register a fictitious business name, also known as DBA, within your county.

• To create an S corp, you need  articles of incorporation, and you will file in the state where your corporation will conduct business. You should incorporate in your home state to avoid submitting annual reports and paying fees in multiple states. With that, you should incorporate in Delaware if you intend to conduct business nationwide.

• From there, you should establish corporate bylaws regarding your company operations, in addition to general duties and officer roles. In certain cases, the bylaws are not mandated by state authorities, but you should draft bylaws to manage your business efficiently.

• After, you need to get an employer identification number. You can do so by getting an EIN from the IRS website. You may also apply for an EIN via phone or mail.

• When it comes to licenses, you may need local and state permits depending on your industry.

If you find yourself lost during the process, you may hire an attorney to guide you accordingly.

S Corp Restrictions

Before you petition for S corp status, you must ensure that your corporation would qualify. An S corp needs to adhere to the following mandates:

• An S corp can only have one stock class (no tiered stock allowed)

• Only 100 shareholders or less are permitted

• The S corp must be a domestic corporation

• Other entities cannot own an S corp, such as partnerships and other corporations

• Non-residents and non-U.S. citizens cannot own an S corp

To learn more about S corporation formation,  submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the top law schools in the county and will help you through the S corp registration process, including whether a corporation is the best choice for your business. Also, they will help you maintain your corporation so your business can remain in good standing with authorities.