How to Form a S Corporation

 

You may have questioned as a company owner, “How do I form a S corporation?” You may construct a S corporation (S corp) by founding a limited liability company (LLC) or a corporation and applying to the IRS for S corp status by completing Form 2553 Election by a Small Business Corporation when you file for your Employer Identification Number (EIN). S corporations may give large tax savings while still providing little liability protection. Our How to Start a S Corp tutorial will assist you in answering typical S corp questions.

An S corporation is a tax categorization used by the Internal Revenue Service (IRS) for federal and state income taxes with pass-through taxation. It is not a company structure. The S corporation tax classification is used to decrease a company’s tax burden.

In our How to Form a S Corp tutorial, we will discuss when you should select S corp status and the actions required to start a S corp.

Considerations Before Forming a S Corp

Before forming a S corporation, examine the following aspects on how to create a S corporation:

Is a S corporation the best option for your company?
S company rules and regulations
Why is an LLC the ideal company form for S corporation tax status?
Are S corporation tax advantages correct for you?

Key Takeaways for Starting a S Corp:

Create a formal business structure, such as a limited liability company (LLC) or corporation.
Select S corporation status with IRS Form 2553. (in NYC also form CT-6)
Comply with all S corp IRS rules.
You must be a United States citizen or a permanent resident alien.
Owners must pay themselves a fair wage.
Profits should be at least $80,000, with payouts of at least $20,000

Is a S Corporation the Best Business Structure for You?

Businesses that choose S corporation status must employ payroll and accounting services.
S Corporation Prerequisites

The IRS requires firms that choose S corp status to:

Have no more than 100 stockholders.
Are domestic limited liability companies or corporations used?
Issue just one kind of stock.
Shareholders are either US citizens or permanent residents.
Private persons own them.

Why is an LLC the best structure for a S Corp?

As entrepreneurs, we feel that incorporating a S corporation via an LLC is the best option since the benefits of founding a corporation are offset by S corp limitations. Furthermore, LLCs are less difficult to manage than corporations.

The only state where this may not be true is New York, owing to the state’s LLC publishing rules.

Are S Corporation Tax Benefits Right for You?

You must determine if the S corp tax status is preferable to the default LLC tax status for your company.

How to Form a S Corporation

If you’re thinking about starting a S company, you should know that it’s a tax categorization under Subchapter S of the Internal Revenue Service (IRS) for federal income tax and state tax. For tax purposes, S corp firm owners choose this tax status for either an LLC or a corporation. Corporations with a C Corp IRS tax classification are subject to double taxation (the business is taxed, and shareholders are taxed again on their personal income tax return), whereas LLCs are subject to pass-through taxation (all losses and profits — credits, distributions, and deductions — pass directly to the owner).

To qualify for this form of tax categorization, the company owner(s) must earn a fair remuneration based on their job and the relevant market pay. This is also why the IRS is more concerned with enterprises that choose the S corp tax classification.

Here are several S corporation tax benefits:

Earnings and losses, known as distributions, flow directly to the owner(s)/shareholders after operating expenses are paid, hence S corporations are not taxed at the company level (unlike in a C corp)
Business owners are considered workers and must pay employment taxes and income taxes on their salaries.
Distributions, which are net profits (earnings after operating expenses, deductions, credits, and income), only pay income tax on each individual owner’s personal income tax return under the tax rate in which they are taxed. The tax savings occur here since no employment tax is paid on this component!

There are two major methods to form a S corporation:

When requesting your employee identification number, organize an LLC and obtain S corp tax status from the IRS (EIN)
By creating a company and applying to the IRS for S corp status

The IRS will need you to complete and submit Form 2553.

We do not advocate forming a company with the S corp tax status since it undermines all of the advantages of forming a corporation.

Forming an LLC and Choosing S Corp Status

It is simple to form an LLC and choose S corporation tax status. You may form your own LLC with the S corp status by following our step-by-step instructions.

Five Basic Steps to Forming an LLC and Choosing S Corp Status:

Step 1: Give Your LLC a Name

Step 2: Select a Registered Agent.

Step 3: Submit the Articles of Incorporation.

Create an Operating Agreement in Step 4

Step 5: Obtain an EIN and submit Form 2553 to elect S Corporation tax status.

Step 1: Give Your LLC a Name

When you submit your LLC formation forms, you must offer your state with a unique name that is distinct from all other registered names.

Step 2: Select a Registered Agent for your LLC.

Legal paperwork and tax notifications will be accepted on your LLC’s behalf by your registered agent. When you submit your LLC’s Articles of Organization, you will name your registered agent.

Step 3: File the Articles of Organization for your LLC.

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in certain states, is the document you will submit with the state to legally establish an LLC.

Step 4: Draft an Operating Agreement for your LLC.

An LLC operating agreement is a legal document that defines your LLC’s ownership and member responsibilities.

Our operating agreement generator is a free tool for company owners.

Step 5: Apply for an EIN and fill out Form 2553 on the IRS website.

An EIN is a number assigned by the US Internal Revenue Service (IRS) to companies in order to identify and tax them. It is basically a business’s Social Security number.

When you apply directly with the IRS, EINs are free.

Select S Corporation Tax Status

The IRS will give a link to Form 2553, the Election by a Small Business form, during the online EIN application process.

For full assistance with completing the form, please see our Form 2553 Instructions page.

Steps to Take After Establishing a S Corp

Once you’ve established your S corp, consider using phone.com to set up a business phone number to secure your personal information.

If you need to establish your S corp credit, read our tutorial on how to create business credit and apply for a Divvy business credit card.