How to Start an S Corp? (S Corp Formation Guide)

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Starting an S corporation is a great way to lower your tax burden and make it easy to raise money through investment. With an S corporation, you can retain the flexibility to run your business without as many restrictions as with a C corporation or double taxation.

But, there are some steps involved in electing this useful tax status, so let’s see how your company can get started today.

Forming an S Corp

An S Corp is actually a tax status, which you can elect when forming either an LLC or a corporation. Generally, the better option is forming an LLC and electing S corp status since choosing S corp tax status for a corporation removes some of the benefits of being a corporation.


Starting an LLC with S Corp Tax Status

It’s not hard to start an LLC and elect S corp tax status. Most of the steps you take will be to set up your LLC. To actually elect S corp tax status, you will file Form 2553. We will discuss all the steps you need to take below.


How to Start an S Corp?

1. Select a Name for Your S Corp

Choose-Your-Business-Name

The rules for naming an S Corp/LLC vary from state to state. However, there are some rules that apply in most states. These are:

  • The name you choose cannot be in use by another registered business.
  • Your LLC’s name will generally need to include the words Limited Liability Company, Limited Liability, or an abbreviation of these words.
  • You cannot use words that mislead people about your business, such as using the words bank or lawyer, when you are not part of these industries.

There are many more rules for specific states, so it’s always best to check your state’s rules for business names.

2. Choose a Registered Agent for Your S Corp

Registered-Agent-Service

An LLC (S Corp) is required to have a registered agent available during all business hours to accept service of process and other legal documents. This can be a person or a company, but they must have a physical address in your S Corp’s state of formation. Many owners prefer to have a registered agent service to avoid making their personal information public since the registered agent’s address is part of the public record.


3. File Your Articles of Organization

Articles-of-Organization

This is the document you will file to register your LLC (S Corp) with your state. States vary in what information they require in the document, but these are some of the most commonly required details:

  • Ownership Percentage: You should include the name of each owner and what percentage of the business each person owns.
  • Effective Date: You can list the date if you want your LLC to start sometime after the date your Articles of Organization are processed.
  • Duration of Your LLC: The default duration is perpetual, but you can list an end date if your LLC has one.
  • Name and Address of Your Registered Agent: Your LLC must have a registered agent to accept any notices of a lawsuit and other important legal documents. The registered agent must have a physical address in your state of formation.
  • Manager-managed or Member-managed: This is where you indicate whether your LLC will be managed by a manager or its members.
  • Organizer: You’ll list the person responsible for filing the Articles of Organization. This is generally a member, but it doesn’t have to be.
  • Principal Office: This is the place where you will keep the records for your LLC or the primary place where you’ll conduct your business.

4. Draft an Operating Agreement for Your LLC (S Corp)

Operating-Agreement

Although many states don’t require an LLC to have an operating agreement, it’s a good idea to have one for your LLC. This is a legal document that details the structure of your business along with the rights and responsibilities of its members. So, having an operating agreement can avoid arguments among LLC members in the future.

An operating agreement can include specific rules that will help your LLC run smoothly. You can specify how many votes are required to approve a decision and what will happen to your LLC should a member withdrawal. Also, in most states, you can make many of your own rules for your LLC rather than being limited by your state’s default laws. This will allow you more control over how your LLC is run.


5. Get an EIN

EIN-Employee-Identification-Number

An EIN is an Employer Identification Number or, as it’s sometimes called, a Tax Identification Number. The IRS will use this number to identify your business for tax purposes. You can obtain an EIN for free by applying for one on the IRS website.

You’ll need this number when filing taxes for your LLC or if your LLC has two or more members. You’ll also need an EIN if you want to hire employees.


6. Choose to Be Taxed as an S Corp

TAX-Time

You will be able to elect to be taxed as an S corp when you are applying for an EIN  online. While applying, you will be offered a link to Form 2553, so you can apply for S corp status.

Form 2553 can be relatively difficult to fill out. It consists of four parts that you’ll need to fill out. In Part 1, you’ll fill in general information, including the effective date of your tax election, the information for all of your shareholders, and your EIN. You’ll also sign this part.

In Part 2, you will choose the fiscal year for your business. Part 3 is for those businesses that are choosing the qualified Subchapter S Trust Election. You will need to fill out Part 4 if you are filing late.

Unfortunately, you can’t email this form. You can mail it in or fax it. If you choose to mail the form, just fill it out and make a copy to keep for your records. Then, check the IRS website to find the correct address to use for your state. To fax the form, use the fax number listed for your state on the IRS website.


What Are the Benefits of an S Corp?

There are multiple advantages to an S Corp including:

  • Owners can save money on taxes because they are employees of their business.
  • An S Corp is permitted to sell one class of stock; this makes it easy for outside parties to invest money in the company.
  • S corps benefit from pass-through taxation.

What Requirements Must Be Met to Elect to Be an S Corp?

There are four requirements a business must meet to elect to be an S corp.  These requirements are:

  • It cannot have nonresident alien shareholders.
  • The business can only have one class of stock, and all members must receive the same distributions.
  • It can only have 100 members.
  • Shareholders must be individuals, estates, certain types of trusts, tax-exempt organizations, and estates.

Do S Corps and LLCs Pay the Same Taxes?

S-Corp-and-LLC

S corps and LLCs don’t pay the same taxes. In an S Corp, the members receive a salary which they must pay taxes on. Then if there are any profits, they can take a distribution on which they must pay personal income taxes.

LLCs distribute profits to members, and the members must pay personal income taxes on the distributions. Also, they have to pay self-employment taxes on these distributions.


What Is a Reasonable Salary for a Member of an S Corp?

It is important for S corp members to pay themselves a reasonable salary if the LLC is making a profit. To determine what a reasonable salary is, it’s a good idea to find out what other people with a similar job in your area are making. If the members don’t pay themselves a reasonable salary and get a large distribution, the IRS may think the members are avoiding taxes and choose to audit them.

Distributions are dividends that owners can choose to take when the business makes a profit. The distributions are only taken after any employees are paid. Once the owners receive the distributions, they must pay income taxes on them, but not self-employment taxes.


How Does Pass-Through Taxation Work?

Pass-through taxation is typically used in partnerships, sole proprietorships, LLCs, and S corporations. With this type of corporation, profits are not taxed at the business level. The profits pass through to the owners’ personal tax returns and are taxed at whatever the individual owner’s tax rate is.


What Is the Tax Rate for an S Corp?

An S corp doesn’t pay a corporate tax. The profits from an S corp pass through to each member’s individual tax return and is taxed at the owner’s tax rate.


How Are the Profits from an LLC/S Corp Distributed?

The profits from a single-member LLC pass through to the owner’s personal tax return. Whereas, if your LLC has more than one member, the profits are usually based on the members’ investment in the LLC. Although, this doesn’t have to be the case. You can choose another basis for distributing the profits. However, if you choose to do this, you should include it in your operating agreement.

If you have an S corp, the members must pay themselves a reasonable salary and distribute any remaining profits among the members. These distributions will pass through to the members’ individual tax returns.


S Corp and C Corp — The Difference

S corporations and C corporations are actually tax statuses. However, many people don’t realize this and instead think of these corporations as business structures.

One of the biggest advantages of forming an S corporation is that owners can be taxed as employees. This can reduce your taxes.

C corporations are subject to double taxation, but there are several advantages to forming a C corporation that may make it worthwhile.


Professional Services to Help You Start an S Corp

If you are forming an S corp, you want to make sure you are doing everything right, and either of these services can help make sure you do.

#1 – ZenBusiness

ZenBusiness is one of the top LLC formation services out there. It gets excellent reviews from its customers, and with good reason. They have very competitive prices and provide registered agent service for a year for free. They will also refund your entire purchase as long as your LLC hasn’t been filed with the state.

$49

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Form an LLC today with ZenBusiness for only $49. They Have 98% customer satisfaction rating and over 4500+ verified reviews.


#2 – Incfile

IncFile is a great option for helping you form your S corp. The best thing is that they will start your S corp for free. All you need to pay is the state fees. In addition, you get a year of registered agent service for free. You also get lifetime alerts about anything you need to do to keep your business in compliance with any state requirements.

$0+State Fees

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Rating: 4.8/5
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Form an LLC today with IncFile starting from $0 + state fees. They Have 97% customer satisfaction rating and over 3900+ verified reviews.


Final Thoughts

Forming an S corporation can be a good choice for LLCs and even some C corporations. This tax structure is not hard to qualify for and can greatly reduce your company’s tax burden. So if it’s right for you — don’t hesitate to follow those steps above to form your S Corp.

Or alternatively, just use a professional S Corp creations services listed above.

Good luck with your business endeavors!

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About the Author
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Founder & author

Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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