S Corporation: Benefits and Requirements

A federal tax status with several advantages.

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Corporations that meet certain requirements can elect an s corporation status with the IRS. This federal tax status enables companies to "pass through" their taxable income or losses to owners/investors in the business, according to their ownership stake in the business.

By default, companies that do not specify a tax status with the IRS are considered to be c corporations – which means that they will be taxed as a c corporation. On the other hand, by electing s corporation status, a corporation can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the c corporation tax status.

The cost of a s corp can vary. Say a corporation makes $300,000 in a given year – if it is an s corporation, the business itself will not be taxed for that amount; instead, the company's shareholders will be required to pay taxes according to their share of the company. In this scenario, if the company has three shareholders, each with an equal share of company stock, each shareholder will pay taxes on $100,000.

If the c corporation makes $300,000 in a year, then the company would pay taxes at the current federal corporate tax rate of about 34%. If the remaining profits of $198,000 are distributed to the three shareholders as dividends, each shareholder will pay taxes on $66,000 in dividend income at the current federal dividend tax rate of 15%.

S corporations, like other types of corporate entities, also keep owners' personal assets safe from company debt and judgments against the business.

To learn more about double taxation, watch our video.

In short, the s corporation status offers the following advantages:

  • Limited liability: Company directors, officers, shareholders, and employees enjoy limited liability protection
  • Pass-through taxation: Owners report their share of profit and loss on their individual tax returns
  • Elimination of double taxation of income: Income is not taxed twice; once as corporate income and again as dividend income
  • Investment opportunities: The company can attract investors through the sale of shares of stock
  • Perpetual existence: The business continues to exist even if the owner leaves or dies
  • Once-a-year tax filing requirement (vs. quarterly for a c corporation)

Watch our Video: What is an s corporation?

The Company Corporation can help.

If you have not already formed a corporation, The Company Corporation can help you form your new s corporation in any state or the District of Columbia. The Company Corporation can also provide you with the forms necessary to elect S Corporation status with the IRS. Please note that we do not complete or file the Subchapter S application with the IRS, but our complete formation package does include the required IRS form 2553.

You should be aware that there are certain restrictions on the number and citizenship of shareholders of an S Corporation and that certain other requirements are imposed on s corporations. You may wish to consult with professionals such as attorneys or tax advisors to determine whether an S Corporation is the best option for your company.

It's very important to note that in order to elect an S Corporation status, after your company has been formed, you must file the s corporation form 2553, "Election By a Small Business Corporation." Timing is critical with IRS form 2553 – it must be filed within 75 days of your corporation formation or LLC's anniversary of formation, or within 75 days of a new year. When you form your s corporation with us, form 2553 is provided to you with your formation package.

Learn more

For a comparison of S Corporations and other corporate tax statuses, visit our Frequently Asked Questions section.

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S Corporation FAQs

What is an S Corporation?

S Corporations are formed under the laws of a particular state and are then subject to the laws and regulations of that state. Corporations allow owners to separate and protect their personal assets from the debts and obligations of the business. In a properly formed and managed S Corporation, a judgment against the business should not affect an owner's home, car, savings, or other personal assets.

Shareholders own a corporation and appoint a board of directors to oversee corporate decisions and policies. Directors typically elect officers to manage a C Corporation's day-to-day affairs. Since an S Corporation has a perpetual existence, it does not dissolve if an owner dies or leaves the business.

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Do I need an attorney to form a corporation?

No. You can prepare and file necessary paperwork yourself, or you can use The Company Corporation to incorporate your business. If you are unsure whether incorporating will benefit your business, please call us at 800-818-6082. Our Business Specialists are happy to provide you with the information you need to make the right decision.

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What are the main differences between a C Corporation and an S Corporation?

C Corporations file IRS form 1120 to report corporate income to the Internal Revenue Service. The IRS taxes company profits at corporate tax rates and dividends paid to shareholders at individual tax rates. For this reason, you may hear tax professionals refer to "double taxation" of a C Corporation.

C Corporations can elect "pass-through" taxation by applying to the IRS for status as a Subchapter S Corporation. The S Corporation provides the same protection from personal liability. However, owners can report their share of profit and loss in the company on their individual tax returns. The S Corporation files IRS form 1120s to report income. Entities that have assets in excess of $10 million or file over 250 forms each year must file these s corp forms online.

S Corporations have a number of restrictions. Most notably, only U.S. citizens or permanent residents may own an S Corporation. An S Corporation may not have more than 100 shareholders.

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Should I elect S Corporation status? What are S Corp benefits?

While we can't give legal advice, the benefits of forming an S Corporation include:

  • less risk from government audits, compared to a sole proprietorship.
  • limited personal liability for business debts.
  • ability to deduct the cost of benefits as a business expense.
  • opportunity to raise additional funds through the sale of stock.
  • owners can report profit and loss on their individual tax returns.

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What forms are required to form an S Corporation?

The Company Corporation will guide you through the steps to incorporate your business either online or by telephone. We simplify the process of registering your new S Corporation

  • Form your S Corporation online or contact a Business Specialist at 800-818-6082 (toll-free) or 302-636-5440.
  • We assign your order to a Business Specialist, who contacts you if there are any problems with the preliminary name search.
  • We complete Articles of Incorporation on your behalf. A few states require us to get your signature on the completed documents before submission. Normally, we submit documents directly to the state.
  • We file your documents with the state.
  • We forward the state approval notice to you (generally within 5-10 business days, but turnaround time varies by state).
  • You apply for S Corporation status through the IRS by filing Form 2553 (this form is included with your formation package).
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What is pass-through taxation?

One possible tax advantage of an S Corp is pass-through taxation. Corporations can elect "pass-through" taxation by applying to the IRS for status as a Subchapter S Corporation. The S Corporation provides the same protection from personal liability as a C Corporation. However, owners of an S Corporation can report their share of profit and loss in the company on their individual tax returns. An S Corporation files IRS Form 1120s to report income.

S Corporations have a number of restrictions. Most notably, only U.S. citizens or permanent residents may own an S Corporation. An S Corporation may not have more than 100 shareholders.

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What is the organizational structure of an S corporation?

The company is owned by shareholders, who elect directors. The directors set a vision for the corporation and are responsible for the management of the corporation. The officers and managers hired by the directors are responsible for carrying out the vision on a day-to-day basis.

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Where should I incorporate my business?

Most companies form their corporations in the state in which they will primarily operate or in the state of Delaware in order to have access to its courts and business-friendly laws. Advantages of forming a corporation in your home state include:

  • Fewer complications, if you only plan to operate the business in your home state.
  • No need to pay franchise taxes or file annual reports in more than one state.
  • Less cost.

Many companies conduct business throughout the United States and abroad. An S Corporation with business locations in multiple states may incorporate in a single state, then register to do business in other states. This means that S Corporations must formally register, file annual reports, and pay annual fees in every state in which they conduct business.

Remember, you must separately apply for S Corporation tax status through the IRS by filing Form 2553.

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Is an S corporation required to have a registered agent?

Yes. State laws require all corporations to maintain a registered address with the Secretary of State in each state where they do business. The person or company located at that address, known as the Registered Agent, must remain available during all business hours. A Registered Agent receives and forwards important legal documents and state correspondence on behalf of the business.

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What do I need to do after I form my S Corporation?

Most states require S Corporations to file annual reports and pay franchise taxes to maintain their good standing. Failure to file annual reports and pay franchise taxes can result in fines, notices, and the inability to conduct business. You may be able to file many of these S Corp documents online. The Company Corporation can help you ensure each of your forms are correctly filled out and submitted according to schedule.

State laws require S Corporations to hold annual meetings of shareholders and directors and record meeting minutes. Owners and directors of an S Corporation use corporate minutes to reflect changes in management and important corporate activities.

The Company Corporation can assist you with all of your internal documentation needs.

Additionally, almost all state, county, and local governments require S Corporations to complete business license, permit, and tax registration applications before beginning to operate.

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Can the personal asset protection provided by forming an S Corporation be taken away?

Generally the owners of a corporation cannot be held liable for the debts and obligations of the corporation. However, if owners treat the corporation as an extension of themselves – sometimes referred to as "disregarding the corporation form" - such as by commingling personal and corporate funds or making important decisions without holding board meetings or passing resolutions, then creditors can attempt to hold owners liable for the debts and obligations of the company-often called "piercing the corporate veil." The "corporate veil" can also be lost if a corporation is terminated by a state for failure to file required forms or pay required fees and taxes.

The Corporation Company can help your company maintain its "corporate veil" by providing you with required corporate forms and documents for you to complete and by assisting you in making some state filings.

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Can an S Corp own an LLC?

An s corp can own an LLC. However, only single-member LLCs can own a stake in an s corp. One of the tax advantages of an s corp is similar to that of an LLC in that both can pass their profits and losses through to their personal income tax report each year.

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What is the cost of setting up an S Corp?

The costs associated with setting up an s corp, LLC, and c corp are similar. However, there are other intangible factors you must take into account. Every s corporation is unique and comes with its own set of advantages and disadvantages. Among the subchapter s corporation requirements you must weigh when considering this particular status is that s corporations must file articles of incorporation, keep a record of corporate minutes, hold shareholder and director meetings, as well as allow their shareholders to weigh in with a vote concerning company decisions. S corporations can also only offer common stock to investors, making fund-raising more difficult. If you are still undecided as to the pros and cons of declaring your business an s corporation, please contact The Company Corporation to speak to someone who may be able to set you on the right path.

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What to Expect After Placing Your Order

  • We will complete the state-required forms and submit them to the Secretary of State.
    • This is done within 24-48 hours of when you place your order.
    • If your signature is required on the documents, we will email them to you and arrange for your signature. (Some states permit online formations without signatures.)
    • In some instances we may need to verify your personal information, the company directors' information, or, in the case of an LLC, members' information, before forming the entity.
  • The documents are filed at the Secretary of State's office or its equivalent. Turnaround time varies from state to state.
  • Once the Secretary of State issues evidence of filing, we will review the documentation and notify you that an electronic copy of the evidence is ready to be downloaded.
  • If you choose to receive a hard copy of your evidence, we will send it to you via FedEx.
  • If your package includes a Corporate Kit, you will receive your Corporate Kit as a separate package via FedEx.

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