How to Form an S Corporation

Have you heard of the term s corporation but don’t know exactly what it is? Well, in a nutshell, an S corporation is a type of corporation with special tax status. Unlike C corporation, an S corporation is not a separate taxable entity from the shareholders.

Rather, the shareholders themselves will pay the income tax after lessening all the expenses. Income tax from the company is filed as personal tax of the shareholders. The advantage of opening an S corporation is that it may allow you to save money on corporate tax if you know how to go about it.

How To Open Up One?

Unlike a C corporation, you can’t form an S-corp just anyway you like. Before you open up an S corporation, you have to qualify to be one first. Here are the requirements to qualify as per the IRS:

  1. It must be a domestic corporation.

  2. The corporation is only allowed to have a max of 100 shareholders.

  3. It mustn’t have any non-resident alien shareholders.

  4. Other business entities are not allowed to hold shares of the S corporation.

As long as you follow these rules, you may qualify for opening an S corporation.

What Is the Next Step?

Now that you qualify for an S corporation, you need to submit some requirements to the SEC so that you can open up your S corporation. Here are the next steps:

  1. Choose a name for your corporation and reserve it with the SEC.

  2. Fill out the articles of incorporation and submit it along with your corporation name, address, and list of directors.

  3. Create the bylaws of your corporation and submit it.

  4. Apply for your business permits and other local business documents (this may differ per state).

  5. Register for an Employer ID Number so that you can pay proper income tax.

  6. Submit a Form 2553 to the local tax authorities to elect your corporation as an S corporation.

Once you follow all of those steps, then all you have to do is wait for the approval from the said governing bodies. If any part of the application was rejected, the governing body will give a reason and a chance for you to resubmit. When this happens, just follow the instructions of the respective governing bodies and resubmit your application. Once everything has been approved, then you’re all set to do business.

Final Thoughts

While a lot of people opt to open up a C corporation because it’s easier to do so, an S corporation does have its own benefits with regard to taxation. For example, an S corporation is better if you want to open up a service business. Personal Service Corporations oftentimes need to pay very high tax (35% in most states). If you open an S corporation, you won’t be subject to that high tax rate.

Of course, the decision will depend on your own business strategy. Although an S corporation is more difficult to open, as we can see in the process above, it’s better for some situations. If you think an S corporation is more viable for you, just follow the above mentioned steps to open one.

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