Starting, Forming & Filing an S Corporation

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While many smaller businesses opt for other formats, forming an s corporation can give you the best of pass-through taxation and corporate benefits combined. Starting an s corp doesn't have to be difficult, either. The Company Corporation can guide you through the steps and help you set up your s corp.

Forming an S Corporation

Selecting a Name

The name of your company must be unique and able to distinguish you from other businesses to avoid confusion. If you already have a business name, you will be able to add 'Inc.' or 'Incorporated' to the end of your business name once you create an S corp with that name.

Articles of Incorporation

To set up an s corp, articles of Incorporation need to be filed in the state in which you wish to form. Most business owners incorporate in their home state to avoid having to file reports and make payments in multiple states. However, if you conduct business nationally, you may want to choose to incorporate in a business-friendly state such as Delaware, and register to do business in additional states as needed.

S Corp Requirements

Corporations are required to have a leadership team and hold regular shareholder and director meetings. Minutes from these meetings must be filed internally with the corporate records. Stock transfers and updates to company bylaws require formal processes and documentation. An S corporation cannot have more than 100 shareholders, and only a U.S. citizen or permanent U.S. resident can own an S Corporation.

Shareholder Compensation

Another important consideration when incorporating is to make sure than any shareholder who works for the company is paid a reasonable salary. Even if you are a small company with few shareholders, anyone who works for your business must be paid a market wage and cannot simply take a percentage of the profits as their income at the end of each year.

S Corp Filing Requirements

IRS Form 2553

The most important of the S corporation filing requirements is IRS Form 2553, the "Election By a Small Business Corporation." This form must be filed within 75 days of your corporation's formation, or within 75 days of a new year. The Company Corporation includes Form 2553 in your S Corp formation package and we'll help you make sure you hit the S corp filing deadline.

Annual Taxes (IRS Form 1120S)

Unlike a C Corp, an S corp only has to file taxes annually. S corporations benefit from pass-through taxation, meaning that business profits are not taxed before they are paid as wages or distributions. While the S corporation is not taxed separately, a Form 1120S is the S corp filing form used to report to the IRS on what profits and losses occurred in the business.

Annual Reports

S corporations are required to file annual reports with the states they operate in, and pay franchise taxes to maintain good standing. Franchise taxes are state fees – not to be confused with a business franchise structure like McDonald's. Failure to file appropriate annual reports and pay franchise taxes can result in fines, notices, and the suspension of business privileges by the state.

Business Licenses

All businesses must apply for and keep on file any necessary business permits or licenses. These licenses can include general business permits, occupational licenses, health permits, reseller licenses, and land use permits. The Company Corporation has an easy-to-use Business License Compliance Package that can help make sure your business licenses are in order.

Do I need an attorney to incorporate?

Actually, you don't. You can either fill out the forms yourself, or you can have The Company Corporation assist you. You may need a lawyer for specific legal advice regarding your company, but incorporation can be done simply by filing the necessary forms with the IRS and the state.

Can my S corporation offer preferred stock and common stock?

Unfortunately, your business cannot extend stock offers to other business entities – only individuals. An S corporation is a smaller business, and can have only one class of stock. In addition, only individuals can be shareholders, and a maximum of 100 shareholders is allowed.

What tax benefits do I get from an S corporation?

The primary tax benefit is that you only pay employment taxes on the portion of your income that is your salary. The rest of your earnings from the business are considered a "distribution," which is taxed at a much lower rate. In addition, you avoid corporate profits being taxed by the IRS, and then taxed again as your salary and distribution – a system many tax professionals call 'double taxation'.

What kind of structure does an S corporation have?

Most simply, an S corporation is owned by shareholders who select directors of the company. The directors meet to map the direction of the business, and the officers and managers of the corporation carry out the day to day operations. The profits and losses then go back to the shareholders, after all expenses are paid.

What happens to my corporation if I pass away? Can I hand it down to my heirs?

A corporation is considered to have a life of its own, which means that it continues to operate even if one or more owners pass away. While you can hand your shares of the corporation down to your heirs, your leadership role cannot be handed down. If you leave the business for any reason, the shareholders or directors will choose new leadership at their next meeting.

S Corp Filing Requirements

IRS Form 2553

The most important of the filing requirements is the s corporation form 2553, the "Election By a Small Business Corporation." This s corp filing form must be filed within 75 days of your corporation's formation, or within 75 days of a new year. The Company Corporation includes Form 2553 in your S Corp formation package and we'll help you make sure you hit the s corporation filing deadline.

Annual Taxes (IRS Form 1120S)

Unlike a C Corp, an S corp only has to file taxes annually. S corporations benefit from pass-through taxation, meaning that business profits are not taxed before they are paid as wages or distributions. While the S corporation is not taxed separately, a Form 1120S is the S corp filing form used to report to the IRS on what profits and losses occurred in the business.

Annual Reports

S corporations are required to file annual reports with the states they operate in, and pay franchise taxes to maintain good standing. Franchise taxes are state fees – not to be confused with a business franchise structure like McDonald's. Failure to file appropriate annual reports and pay franchise taxes can result in fines, notices, and the suspension of business privileges by the state.

Business Licenses

All businesses must apply for and keep on file any necessary business permits or licenses. These licenses can include general business permits, occupational licenses, health permits, reseller licenses, and land use permits. The Company Corporation has an easy-to-use Business License Compliance Package that can help make sure your business licenses are in order.

Do I need an attorney to incorporate?

Technically, you don't. You can either fill out the forms yourself, or you can have The Company Corporation assist you. You may want a lawyer for specific legal advice regarding your company, but incorporation can be done simply by filing the necessary forms with the IRS and the state.

Can my S corporation offer preferred stock and common stock?

Unfortunately, your business cannot extend stock offers to other business entities – only individuals. An S corporation is a smaller business, and can have only one class of stock. In addition, only individuals can be shareholders, and a maximum of 100 shareholders is allowed.

What tax benefits do I get from an S corporation?

The primary tax benefit is that you only pay employment taxes on the portion of your income that is your salary. The rest of your earnings from the business are considered a "distribution," which is taxed at a much lower rate. In addition, you avoid corporate profits being taxed by the IRS, and then taxed again as your salary and distribution – a system many tax professionals call 'double taxation'.

What kind of structure does an S corporation have?

Most simply, an S corporation is owned by shareholders who select directors of the company. The directors meet to map the direction of the business, and the officers and managers of the corporation carry out the day to day operations. The profits and losses then go back to the shareholders, after all expenses are paid.

What happens to my corporation if I pass away? Can I hand it down to my heirs?

A corporation is considered to have a life of its own, which means that it continues to operate even if one or more owners pass away. While you can hand your shares of the corporation down to your heirs, your leadership role cannot be handed down. If you leave the business for any reason, the shareholders or directors will choose new leadership at their next meeting.

What is deadline for an S Corp to file its taxes?

For an s corporation filing their taxes (Form 1120s) the deadline falls on the 15th day of the third month at the end of that company's tax year. Since s corporations are required to have a calendar year, this date is usually March 15th.

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