What Is an S Corporation (S Corp)?
It's kind of like the lite version of a c corporation (c corp). An s corp offers investment opportunities, perpetual existence, and that coveted protection of limited liability. But, unlike a c corp, s corps only have to file taxes yearly and they are not subject to double taxation. Read on if this sounds enticing for your business.
S Corp Advantages
Read 'em and weep.
- Limited liability. Company directors, officers, shareholders, and employees enjoy limited liability protection.
- Pass-through taxation. Owners report their share of profit and loss on their individual tax returns.
- Elimination of double taxation of income. Income is not taxed twice – once as corporate income and again as dividend income.
- Investment opportunities. The company can attract investors through the sale of shares of stock.
- Perpetual existence. The business continues to exist even if the owner leaves or dies.
- Once-a-year tax filing requirement. Versus c corps, which must file quarterly.
S Corp Disadvantages
There's a lot to love, but here's a few things to consider before adding the 's' to your corp.
- U.S. citizens and permanent residents only. Unlike the c corp and LLC (Limited Liability Company), you have to be a legal resident of the U.S.
- Limited ownership. An s corp may not have more than 100 shareholders.
- Formation and ongoing expenses. It is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees.
- Tax qualification obligations. Mistakes regarding the various filing requirements can accidentally result in the termination of s corp status.
- Closer IRS scrutiny. Payments to employees and shareholders could be distributed as either salaries or dividends. Each are taxed differently, which is what leads the IRS to scrutinize that distribution more closely.
S Corporation vs. C Corporation
What is an s corp?
As we described above, an s corp is something like the lite version of a c corp. That is, when you consider its growth potential and organizational structure.
Every business that files for corporation is first classified as a c corp. Once that's complete, you have to then file for subchapter s corp status and meet all requirements for an s corp – namely, have fewer than 100 shareholders who are all individuals, not corporations; have only one class of stock; and be owned by U.S. citizens or resident aliens. All of which are pretty easy requirements for most small businesses.
Back to the perk of saving money. An s corp is not subject to double taxation as a c corp is. That means that an s corp's revenue is not taxed at the corporate level. It's only taxed when paid out as salaries or dividends to shareholders. That alone could save an s corp hundreds of thousands of dollars. For this reason, a c corp makes very little sense for a small business. But if you opt for an s corp, make sure you have a solid accountant as one mistake in filing can send your company back to c corp status, leaving it open to be taxed twice.
How to Start and Form an S Corp
- Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
- Draft and file your Articles of Incorporation with your Secretary of State.
- Issue stock certificates to the initial shareholders.
- Apply for a business license and other certificates specific to your industry.
- File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
- Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
- File the IRS form 2553 within 75 days of your corporation formation.
What are the requirements to form an s corp?
ASM Legal Professional Corporation will guide you through the steps to incorporate your business either online or by telephone. We simplify the process of registering your new s corp
- We assign your order to a Business Specialist, who contacts you if there are any problems with the preliminary name search.
- We complete Articles of Incorporation on your behalf. A few states require us to get your signature on the completed documents before submission. Normally, we submit documents directly to the state.
- We file your documents with the state.
- We forward the state approval notice to you (generally within 5-10 business days, but turnaround time varies by state).
- You apply for s corp status through the IRS by filing Form 2553 (this form is included with your formation package).
What is the cost of setting up an S Corp?
The costs associated with setting up an s corp, LLC, and c corp are similar. However, there are other intangible factors you must take into account. Every s corp is unique and comes with its own set of advantages and disadvantages. Among the subchapter s corp requirements you must weigh when considering this particular status is that s corps must file articles of incorporation, keep a record of corporate minutes, hold shareholder and director meetings, as well as allow their shareholders to weigh in with a vote concerning company decisions. S corps can also only offer common stock to investors, making fund-raising more difficult. If you are still undecided as to the pros and cons of declaring your business an s corp, please contact ASM Legal Professional Corporationto speak to someone who may be able to set you on the right path.
Is an s corp required to have a registered agent?
Yes. State laws require all corporations to maintain a registered address with the Secretary of State in each state where they do business. The person or company located at that address, known as the registered agent, must remain available during all business hours. A registered agent receives and forwards important legal documents and state correspondence on behalf of the business.
What do I need to do after I form my s corp?
- Most states require s corps to file annual reports and pay franchise taxes to maintain their good standing. Failure to file annual reports and pay franchise taxes can result in fines, notices, and the inability to conduct business. You may be able to file many of these S Corp documents online. ASM Legal Professional Corporationm can help you ensure each of your forms are correctly filled out and submitted according to schedule.
- State laws require s corps to hold annual meetings of shareholders and directors and record meeting minutes. Owners and directors of an s corp use corporate minutes to reflect changes in management and important corporate activities.
- Additionally, almost all state, county, and local governments require s corps to complete business license, permit, and tax registration applications before beginning to operate.
What is the organizational structure of an s corp?
The company is owned by shareholders, who elect directors. The directors set a vision for the corporation and are responsible for the management of the corporation. The officers and managers hired by the directors are responsible for carrying out the vision on a day-to-day basis.
Can an S Corp own an LLC?
An s corp can own an LLC. However, only single-member LLCs can own a stake in an s corp. One of the tax advantages of an s corp is similar to that of an LLC in that both can pass their profits and losses through to their personal income tax report each year.
Can the personal asset protection provided by forming an s corp be taken away?
Generally the owners of a corporation cannot be held liable for the debts and obligations of the corporation. However, if owners treat the corporation as an extension of themselves – sometimes referred to as "disregarding the corporation form" – such as by commingling personal and corporate funds or making important decisions without holding board meetings or passing resolutions, then creditors can attempt to hold owners liable for the debts and obligations of the company-often called "piercing the corporate veil." The "corporate veil" can also be lost if a corporation is terminated by a state for failure to file required forms or pay required fees and taxes.