Starting a business in the United States is not a simple process and you may have to face many exciting and difficult experiences.
If you are looking to start a business, you may have a good financial status, and business and promotion ideas, but understanding the legal activities including business structure, tax status, and more is the primary activity in starting a business.
If you are looking to start a small business, then the S-Corporation is the best tax status for your corporation or LLC.
This guide will help you get started if you choose the tax status as S-Corp.
What Is an S-Corporation?
An S-Corp or S Corporation also called an S subchapter is actually not a business structure, it is a tax designation.
If you are starting a business and looking for the S-Corp status, you must meet the Internal Revenue Code (IRC) requirements.
Generally, small businesses with 100 or fewer shareholders, can apply for an S-Corp status and it gives a company the consistent benefits of incorporation while enjoying the tax-exempt privileges of a partnership.
What are the Advantages of having an S-Corp Status?
S-Corp status provides more tax advantages to businesses than having C-Corp status.
- S-Corps are not taxed at the business level: The primary attribute of an S-corporation is its “pass-through” tax structure, which means it may pass income, credits, deductions, and losses directly to shareholders, without having to pay federal corporate taxes. It avoids the double-taxation.
- Employees Salary: Shareholders are considered employees and pay their salary employment taxes and income tax.
- Tax Savings: Distributions, which are considered as net profits (profits after operational costs, deductions, credits, income) only pay income tax on each individual owner’s personal income tax return at their tax bracket. This is where the tax savings happen since there is no employment tax paid on this portion!
Differences between the Business Structures
|Sole proprietorship||One person||Unlimited personal liability||Self-employment tax|
|Partnerships||Two or more people||Unlimited personal liability unless structured as a limited partnership||Self-employment tax (except for limited partners)|
|Limited liability company (LLC)||One or more people||Owners are not personally liable||Self-employment tax|
Personal tax or corporate tax
|C Corporation||One or more people||Owners are not personally liable||Corporate tax|
|S Corporation||One or more people, but no more than 100, and all must be U.S. citizens||Owners are not personally liable||Personal tax|
|B corporation||One or more people||Owners are not personally liable||Corporate tax|
|Nonprofit||One or more people||Owners are not personally liable||Tax-exempt, but corporate profits can’t be distributed|
Basic Requirements to apply for an S-Corporation Status
The IRS requires that set the basic requirements to apply for the S corp status:
- Have 100 shareholders or less
- Are domestic LLCs or corporations
- Issue only one class of stock
- Shareholders are U.S. citizens or permanent resident aliens
- Are owned by private individuals
How to Start an S-Corp Business?
To get an S-Corp Status, you must register your business as a Corporation or LLC.
Step 1: Name your LLC or Corporation
If you are new to the business and do not already have a legal business entity, you need to provide a unique and distinguishable business name from all other business names when filing your LLC or corporation formation documents.
Step 2: Choose a Registered Agent
All formal business organizations, such as an LLCs or Corporations, must have a registered agent to receive legal communications and other documents on behalf of the business.
Businesses must list the registered agent on the articles of the Organization.
Step 3: File your Articles of Organization
Articles of Organization are sometimes referred to as a certificate of formation, or a certificate of organization is the document you file officially with your state.
Step 4: Create your Business Operating Agreement
An operating agreement is a legal document that listed the leadership and member roles of your LLC or Corporation.
Step 5: Get an EIN or Tax ID
Before you can apply for an S-Corp status, you’ll need an EIN or Tax ID. Once your business has been officially established, you can get a FEIN at no cost on the IRS website.
Step 6: File Form 2553, Election by a Small Business Corporation
Once you got the EIN, you can apply for Form 2553 to get an S-Corp Status.
A corporation or LLC can eligible to be treated as a corporation files this form 2553 to make an election under section 1362(a) to be an S-Corporation.
Visit https://www.irs.gov/instructions/i2553 to know more about filling out Form 2553.
Note: If you file Form 2553 no later than 2 months and 15 days after the date of formation, you may be able to claim S-Corp status for the current tax year.
If your election falls after this, it will be valid for the following year.
Step 7: Maintain the IRS Requirements
You don’t need to file form 2553 for renewing your S-Corp each year, but you do need to make sure your LLC or corporation continues to meet the requirements for shareholders and stock.
If it doesn’t, you will lose the S-Corp and should be treated as a C-Corp status or traditional LLC taxation structure.
If you are elected for an S-Corp status, you must file Form 1120-S to report the income, losses, and other business details to the IRS every year.
If you start a small business and looking for an S-Corp status for tax advantages, you must be more aware of the registration process. You must do more research on your own and discuss the process with an experienced accountant before start applying for S-Corp status.