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What should you know before starting your S corporation?
Before we get into how to form an S corporation, you should be aware of its registration requirements and ownership.
Refer to the following section to see if you’re qualified to set up an S corp.
Make sure you can own an S corp
Not all individuals are allowed to be S corp owners.
Specifically, the S corporation treatment is only available to the following:
- US citizen/resident (cannot be a non-resident alien)
- Allowable individual or legal body (e.g., certain trusts, estates, and single-member LLCs)
An S corporation cannot have more than 100 shareholders or owners, each owner cannot be an ineligible business, including:
- Financial institutions (e.g., banks, savings, and loans company)
- Domestic international sales corporations
- Insurance companies
- C corporation, other S corporation, partnership, multi-member LLCs
- Foreign trusts
If you don’t operate one of these forbidden companies, then an S corp could be a great option for you. However, there are a few criteria to consider as well.
Make sure you qualify for S corp status
In order to elect S corporation status, your business must meet the following criteria:
- Be structured as either an LLC or a corporation
As mentioned above, an S corporation is a federal tax designation. This means that you cannot simply form an S corp; you must first register as a C corporation or LLC and file the necessary forms with the IRS to qualify for the S corp status.
- Must have only one class of stock
An S corporation can only have one class of stock, meaning all shareholders must have equal rights and privileges with regard to ownership stake.
You cannot issue distinct stock classes with different treatment, such as class A and class B, or voting and non-voting shares.
- Obtain consent of all the company’s shareholders
Once your company is registered and you’ve decided that you would like to elect S corporation status, all shareholders must sign and date Form 2553, also known as the Election by a Small Business Corporation form.
This form indicates that they consent to the company becoming an S corporation. Remember that if any shareholders fail to sign Form 2553, the IRS will automatically classify your company as the original structure (e.g., a C corporation or an LLC).
- File Form 2553 with the IRS
You must file Form 2553, signed by all your company’s shareholders, with the IRS, in order to elect S corporation status.
Keep reading and learn how to create an S corporation in the following section.
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How to start an S corporation in the US?
If you wish to choose S corp status for your business, you must first register as a C corporation or an LLC, and then file the Election by a Small Business Corporation form to qualify as an S corporation.
Below is our 5-step guide that helps you form your C corp/LLC to file an S corp election form.
Step 1: Choose your state of incorporation
You will first need to determine which state you’ll incorporate your business in. A few things to consider include:
- Where the business will be physically located
- Where the majority of your customers or clients are located
- What are business regulations in each state
- Which taxes you’ll have to pay
A lot of factors may impact your decision when choosing the best state to form your LLC or corporation, but ultimately, the most important thing is that you choose the state that makes the most sense for your business.
Step 2: Choose a unique business name
You must choose a unique business name to register your company with.
Most states will require you to check if your chosen name is available or already taken by another company.
You should search federal and state trademark databases and do as much research as possible to see if anyone else has already laid claim to your desired name.
Step 3: Appoint a registered agents
Almost all states require you to appoint a registered agent for an LLC or Corporation.
The requirements for a registered agent vary by state, but typically the agent must be a state resident and have a physical address in the state.
Many business owners choose to use a registered agent service to fulfill this role. This is to avoid having to be physically present to receive legal notices and to keep personal home addresses off public incorporation documents.
Step 4: File the Articles of Incorporation/Organization
After you have chosen your state, business name, and registered agent, you will be ready to file the Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) with the state.
The filing fee and required documents vary by state, but you will likely need to include:
- Name and address of the registered agent
- Names and addresses of the incorporators
- Business purpose of the corporation
- Number of shares the corporation is authorized to issue
Step 5: File Form 2553 to apply for S corp status
Once your corporation is formed, you will need to file Form 2553 within these timeline restrictions to elect S corp status:
- No later than 75 days after your selected tax year begins; or
- Any time during the tax year before the tax year that S corporation status will take effect
Within 60 days of filing, the service center will notify you about whether your application was accepted.
Once accepted, your S corporation tax status will remain in effect until it’s terminated or revoked.
How much does it cost to start an S corp?
The cost to create an S Corp is the same as the cost to create a corporation or LLC.
Almost all states require a filing fee at the time you submit your formation documents.
This fee varies wildly by state, but you can expect to pay between $100 to over $400, excluding any lawyer’s fees, should you choose to hire one. The exact fee can be obtained by visiting your specific state’s SOS website.
The filing fee of an LLC is typically lower than the fee for incorporating as a C corporation.
Depending on your business activities, you may need to obtain one or more licenses from state and/or local authorities.
The best way to find out which licenses and permits apply to your business is to contact your city or county clerk’s office or the state agency that regulates your type of business.
Registered agents’ service fees
While not required in all states, many business owners opt to use a registered agent’s service, which costs from $50 to $500 per year.
Forming an S corp is a great way to save on taxes and protect your personal assets from business liabilities. However, it’s important to understand the eligibility requirements and filing process before taking this step.
If you’re overwhelmed or confused during any stage of the process, consider contacting one of our friendly consultants for practical advice via email@example.com.
Frequently Asked Questions
What are the benefits of creating an S corp?
The main benefit of creating an S corp is that it can help you save on taxes. S corps are not subject to the double taxation that C corps are, meaning that the corporation’s income is only taxed once at the shareholder level.
Another benefit of an S corp is that it can help protect your personal assets from business liabilities. Because an S corp is a separate legal entity from its shareholders, the shareholder’s personal assets are typically not at risk if the corporation is sued or incurs debt.
How should I calculate taxes for my S corporation?
The tax rate for S corporations is the same as the tax rate for C corporations. However, because S corporations are not subject to double taxation, the tax burden is typically lower for S corporations than for C corporations.
To calculate your S corporation’s taxes, you will first need to calculate the corporation’s taxable income. Then, you will apply the appropriate tax rate to that income.
Can I change from an LLC to an S corp?
Yes, you can change from an LLC to an S corp by filing Form 2553 with the IRS. However, there are a few things to keep in mind before you make the switch.
First, you’ll need to determine whether or not your LLC meets the IRS’s eligibility requirements.
Second, you’ll need to decide if the benefits of an S corp are worth the hassle of complying with additional IRS regulations.
And third, you’ll need to decide if your state has any laws that would prohibit you from identifying your LLC as an S corp.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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