Starting a business is exciting, and choosing the proper legal structure is crucial for success. An S Corporation is popular among small and medium-sized companies, startups, and entrepreneurs due to its limited liability protection and pass-through taxation benefits. If you’re considering starting an S Corporation, this step-by-step guide will provide the information you need to get started. Read on to learn how to start an S Corporation.
What is an S Corporation, and Why Should You Start One?
An S Corporation is a type of legal structure for businesses that combines a corporation’s liability protection with a partnership’s tax benefits. In an S Corporation, the profits and losses of the company are passed through to the shareholders’ personal tax returns, allowing for pass-through taxation. This structure is ideal for small and medium-sized businesses, startups, and entrepreneurs who want to limit their personal liability and avoid double taxation. In this article, we’ll explore the benefits of starting an S Corporation and provide a step-by-step guide on how to do it.
Step 1: Choosing Your Business Name and Structure
The first step to starting an S Corporation is to choose a name for your business and determine the legal structure. The name you choose should be unique, easy to remember, and not already in use by another business. Conducting a thorough search is essential to ensure that your chosen name is available and does not infringe on any existing trademarks.
Next, you will need to determine the legal structure of your business. S Corporations are required to have a domestic corporation structure, which means that the business must be registered and headquartered in the United States. You can choose from several legal structures, including a sole proprietorship, partnership, LLC, or corporation. Each structure has its own advantages and disadvantages, so it’s important to research and choose the one that best fits your business needs.
Step 2: File Articles of Incorporation with Your State
Once you have chosen your business name and legal structure, the next step to start an S Corporation is to file articles of incorporation with your state. This document serves as a legal record of your business. It outlines important details such as the name of your corporation, its purpose, the names and addresses of the incorporators, and the number and types of shares of stock that will be issued.
To file articles of incorporation, you must provide the required information and pay any associated fees to the Secretary of State’s office in the state where you plan to incorporate. The filing process can vary by state, so it’s important to research your state’s specific requirements and guidelines.
Once your articles of incorporation have been approved and filed, you will receive a certificate of incorporation, which serves as legal proof that your business is recognized as a corporation in your state. This step is essential for protecting your business and personal assets by creating a separate legal entity.
Step 3: Obtain the Required Business Licenses and Permits
After you have filed your articles of incorporation and established your S Corporation, the next step is to obtain any necessary business licenses and permits required by federal, state, or local authorities. The types of licenses and permits needed can vary depending on the type of business you are operating and the location in which you operate.
Some common licenses and permits businesses require to include zoning permits, occupational licenses, health department permits, and environmental permits. These permits help ensure that your business is operating in compliance with all applicable laws and regulations and that you are providing safe and ethical products or services.
It’s essential to research and obtains all necessary licenses and permits before starting your business to avoid potential legal or financial penalties. You can find information on required licenses and permits by contacting your local government or visiting their website.
You demonstrate your commitment to operating your business legally and responsibly by obtaining the required licenses and permits. In the next step, we’ll explore electing S Corporation status and taking advantage of its tax benefits.
Step 4: Create Your Corporate Bylaws and Issue Stock
Corporate bylaws are rules that outline how your S Corporation will operate. They typically include information about how shareholder meetings will be conducted, how the board of directors will be selected, and how company officers will be appointed.
After you have created your bylaws, the next step is to issue stock. As an S Corporation, you are required to issue only one class of stock, which up to 100 shareholders can own. This differs from other types of corporations that can issue multiple classes of stock.
When issuing stock, it’s important to follow the rules and procedures outlined in your bylaws and to comply with any applicable securities laws. This will help ensure that your business is operating legally and that all shareholders are treated fairly.
By completing this step, you will have established the framework for your S Corporation and taken the necessary steps to ensure that your business complies with applicable laws and regulations. In the next step, we’ll explore how to elect S Corporation status and take advantage of its tax benefits.
Step 5: Obtain an Employer Identification Number (EIN) from the IRS
After creating your corporate bylaws and issuing stock, the next step to start an S Corporation is to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
An EIN is a unique nine-digit number that identifies your business for tax purposes. You will need an EIN to file your business tax returns, pay taxes, and hire employees.
You can apply for an EIN online through the IRS website, by mail, fax, or by phone. The application process is free and typically takes just a few minutes.
When applying for an EIN, you must provide information about your S Corporation, such as its legal name, business address, and the names and Social Security numbers of its owners or shareholders. Once you assign an EIN, you will use it to identify your S Corporation for tax purposes.
By obtaining an EIN, you can conduct business legally and in compliance with applicable tax laws. In the next step, we’ll explore how to elect S Corporation status and take advantage of its tax benefits.
Step 6: Elect S Corporation Status with the IRS
One of the primary benefits of electing S Corporation status is pass-through taxation. This means that your S Corporation passes through its profits and losses to shareholders, who report them on their individual tax returns. This can help you avoid double taxation, a common issue with other corporations.
To elect S Corporation status, you must file Form 2553 with the IRS within 75 days of incorporating your business. This form notifies the IRS that your business has elected S Corporation status and provides information about its shareholders and other important details.
Furthermore, it’s important to note that not all businesses are eligible for S Corporation status. For example, your business must be a domestic corporation, have only one class of stock, and have no more than 100 shareholders.
In the next step, we’ll explore maintaining proper corporate records and filing tax returns.
Step 7: Set Up Your Corporate Records and Tax Filings
Once you have elected S Corporation status, setting up your corporate records and tax filings is the next step in starting an S Corporation.
Maintaining proper corporate records is important for several reasons. It can help protect you and your business from liability issues that may arise in the future.
Some important corporate records to maintain include minutes of shareholder and director meetings, stock transfer ledgers, and financial statements. Establishing a record-keeping system for contracts, agreements, and other important documents is also a good idea.
In addition to maintaining proper corporate records, you must file tax returns for your S Corporation. This includes filing an annual tax return (Form 1120S) and providing each shareholder with a Schedule K-1, which reports their share of the S Corporation’s income, deductions, and credits.
It is also important to work with a qualified accountant or tax professional to ensure that you file your tax returns correctly and on time. Failing to file your tax returns or maintaining improper corporate records can result in penalties and legal issues for your business.
So, by correctly setting up your corporate records and tax filings, you can ensure that your S Corporation complies with applicable laws and regulations and prepares for any potential tax issues.
Starting an S Corporation can be a complex process, but it’s a great way to enjoy tax benefits, protect your personal assets, and set your business up for success. Follow the steps outlined in this guide to start an S Corporation and take advantage of the benefits it offers and avoid common mistakes that can lead to legal and financial issues down the road.
Remember to choose a business name and structure, file Articles of Incorporation with your state, obtain required business licenses and permits, create your corporate bylaws and issue stock, obtain an Employer Identification Number (EIN) from the IRS, elect S Corporation status, and set up your corporate records and tax filings.
It’s also important to work with qualified professionals, such as attorneys and accountants, to ensure that you are complying with all applicable laws and regulations and protecting your personal assets.
If you’re considering starting an S Corporation, don’t hesitate to take action. By following these steps and seeking guidance when necessary, you can set up your business for success and enjoy the benefits of being an S Corporation. Good luck!