How to Form an S Corp – A Brief Breakdown

Are you confused about what an S Corp is? How do you turn your business into one and maintain it?

An S Corporation is not a business structure at all. It is a special tax status that can save money come tax-filing time. It saves you money because it is a pass-through entity, which means you file your business taxes together with your taxes.

S Corp Requirements

Not every business can be an S Corp. Some companies, such as certain financial institutions and insurance companies, are ineligible. According to the IRS, you must also be able to meet a few requirements, which include:

  • Being a domestic corporation
  • Have only allowable shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock

It is important to note that some states and jurisdictions don’t recognize S corporations like Texas and New York City, so make sure you are in a place that does.

How Do You Make an S Corp?

S corporations must start as another business type, an LLC or C Corp. If you form an LLC, all you have to do is elect S Corp tax status when you request your EIN (Employer Identification Number). You can select the S Corp status from the IRS to change from a C Corp. The necessary form you’ll need to do so is called Form 2553.

What is the Difference Between S Corp and an LLC?

While both entities provide liability protection, S Corp offers corporations with 100 shareholders. They are also taxed differently, which is why many decide to change over, as it has the potential for thousands in federal income tax savings. It also pays income tax and self-employment on the entire amount of the company’s profits. See a business advisor or CPA to help you figure out a compatible business structure.

Read our blog on the differences between an LLC and a Corporation for more information.

How Do You Maintain This Entity Status?

Fortunately, you do not have to elect S Corp status yearly as it’s only a one-time thing. You’ll need to create and file the same paperwork as a C Corp, such as Articles of Incorporation, Employment Tax Forms, and Income Tax Returns. Depending on your local city and county government, you might also have to do local tax filings. Ensure you see an accountant who knows which taxes you must file and when.

By law, you must also hold an annual shareholder meeting and record the minutes. Even if you’re only one person, this is still a requirement. Also, ensure whether or not you’re located in a state that requires a publication announcement. This means you must publish an announcement in a newspaper about your company’s formation.

Maintaining this entity can take more work than an LLC, but you must weigh the pros and cons to see if this is the right move for your business.

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