How to Create an S Corp, Step-by-Step

Choosing the right tax election for your business is one of the most critical decisions you’ll make as an entrepreneur. Your chosen tax status will determine your tax liability, deductions, and credits, which could significantly affect your business’s bottom line.

One designation that has gained significant traction among business owners in recent years is S corporations. These entities offer a unique blend of a corporation’s limited liability and a limited liability company’s pass-through tax status.

But as great as S-corps sound, creating them is not easy. You’ll have to fulfill several requirements before you can reap its benefits.

What is An S Corporation?

S-corporations are corporations elected by the Internal Revenue Service to have pass-through tax status.

These entities do not pay taxes themselves. Instead, everything they earn and lose flows through to their shareholders, who then have to report their share on their tax returns. This setup allows them to avoid double taxation, which is common among traditional or C corporations.

Many entrepreneurs find this tax designation appealing, but it’s important to note that not all businesses can qualify for the S-corp status.

According to the subchapter “S” of the Internal Revenue Code, a corporation will only be granted the S-corp status if it meets the following criteria:

• It must be a domestic corporation.
• It must have no more than 100 shareholders.
• It must issue one class of stock.
• It must not be an ineligible corporation such as a financial institution, insurance company, or domestic or international sales corporation.

Is the S Corp Designation Right for Your Business?

Like any other tax status, there are advantages and disadvantages to the S corp election. You must carefully consider these factors when determining whether the designation is right for your business.

Advantages of the S Corp Status

• Corporate Benefits: Employees who are also shareholders can access certain corporate benefit plans, such as health and life insurance, without being classified as taxable income.
• Easy Transfer: Shares from an S corporation can easily be transferred without hefty tax consequences, making it easier for the company to attract new investors. However, since S corporation shareholders are restricted, your transfer options will likely be limited.
• Succession Planning: Since S corp shares are easy to transfer, shareholders won’t have difficulty transferring their interest to their beneficiaries. This feature will make estate planning easier for those who want to guarantee business continuity.

Disadvantages of the S Corp Status

• Forfeitable Shares: Shares from an S corp can be recognized as forfeitable assets in courts, meaning they can be seized in legal proceedings.
• Limited Shareholders: S corps can only have a maximum of 100 domestic or foreign shareholders.
• High-Income Tax Rates: Although S corps don’t pay income taxes, their shareholders do. If your income is relatively high, you could pay more taxes than you initially thought.
• Strict Compliance Requirements: If your S corp designation was compromised by noncompliance, the IRS will revoke your status and charge back the taxes you haven’t paid for the last three years. You’ll also have to wait at least five years to regain your S corp status.

How Do I Create An S Corp?

Here’s how you can create your S corp:

Form Your Corporation

The first step to creating an S corp is forming your corporation. The procedures and requirements for establishing corporations vary from state to state. But generally, you’ll have to submit your articles of formation to your Secretary of State and pay the associated filing fee.

The articles of incorporation are a primary document you’ll need to form your corporation. It includes basic information about your business, such as:

• Your corporation’s name.
• The name and address of your corporation’s registered agent.
• Your corporation’s legal structure.
• The names and addresses of your corporation’s shareholders.
• The type and amount of authorized shares your corporation can issue.
• The duration of the corporation, if applicable.

Get An Employer Identification Number

An Employer Identification Number (EIN) is a unique nine-digit code the IRS uses to identify businesses from one another. Your corporation will need an EIN to do various business activities, such as paying taxes, opening bank accounts, and hiring employees.

You can get your EIN from the IRS website for free.

Issue Stock

Once you’ve incorporated your corporation, you can start issuing stock to your shareholders through paper or electronic certificates.

It’s important to remember that the IRS has very strict requirements for issuing stock. Your corporation may not issue stock to more than 100 shareholders and should only have one class of stock to be eligible for the designation.

Form Your Board of Directors & Appoint Officers

Once you’ve issued stock to your shareholders, you can form your board of directors. This board will then appoint officers to manage the corporation’s day-to-day operations.

Apply for the S Corp Election

To apply for the S corp election, you must fill out and submit Form 2553 to the IRS. If you complete the application process within two months and 15 days after the beginning of the current tax year, the designation will be valid for that year.

However, if your application is accepted after the 15-day threshold, it will be valid for the following year.

Before applying for the election, you must ensure your corporation fits the IRS criteria. This way, you can guarantee that your application will be approved.

How Much Does It Cost to Create An S Corp?

The cost of creating an S corp varies depending on your state’s filing fees for corporations. Although applying for the S corporation status is free, you must still pay formation fees when establishing your corporation.

Create Your S Corporation Today

Need help creating your S corp? Inc. Authority is here to assist you!

Inc. Authority offers free formation services to business owners nationwide. Our business formation specialists will help you create your S corp free of charge. From filing your articles of incorporation to submitting your Form 2553, we’ll ensure that your S corp is structured for success.

To learn more about our free formation services, visit our website here.