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What's an S Corp?
Fun fact: An S Corp is simply a C Corp that meets certain requirements and has elected to be taxed under Subchapter S of the Internal Revenue Code. They’re a popular choice for businesses that want the benefits of pass-through taxation without limiting their ability to raise venture capital.
Are there restrictions to becoming an S Corp?
Just like any exclusive club, yes. To qualify for S Corp status, the IRS requires the corporation to…
- Be an eligible, domestic corporation (insurance companies, domestic international sales corporations, and certain financial institutions are not eligible)
- Have no more than 100 shareholders
- Limit shareholders to US citizens, legal US residents, estates, and certain types of trusts
- Issue only one class of stock
How are S Corps taxed?
At a federal level, an S Corp's profits and losses are “passed-through” the business and reported on the owners’ personal federal tax returns. An informational federal tax return is still filed by the S Corp, but with few exceptions (the built-in gains tax and passive investment income tax, for example), no taxes are paid at the corporate level.
What are the advantages of an S Corp?
- Limited liability protection
- Pass-through taxation
- Increased investment opportunities
- No self-employment taxes
- Perpetual existence
- Easily transferrable ownership
- Option to retain earnings within the company
What are the disadvantages of an S Corp?
- Complex obligations to obtain and maintain tax status as an S Corporation
- Complex formal compliance requirements
- Less flexibility of allocating profits/loses among shareholders
- Stock ownership restrictions
- Shareholders pay personal taxes on all corporate profits, even if the profits aren’t distributed to the shareholders
How is an S Corp formed?
To create an S Corp, you’ll need to file articles of incorporation with your state, designate a registered agent, and pay the necessary filing fees. Depending on your state, you may also be required to file an initial report and/or publish a public notice of your corporation’s existence.
Once your filing is complete at the state, you must file Form 2553 (Election by a Small Business Corporation) to notify the IRS that you want your corporation be taxed as an S Corp. Check it out: This must be completed within 75 days from when you form your corporation. If you miss the deadline, you’ll have to wait and file within the first 75 days of the next new year. Until that happens, you'll remain a C Corp.
After registering your business, you must also obtain any business licenses and permits that may be required for your S Corp to legally conduct business. Those licensing requirements can vary greatly depending on location, industry type, number of employees, and more.
What are the name requirements for an S Corp?
Each state has its own specific naming requirements, but in general, you’ll need to choose a name that isn’t the same as (or deceptively similar to) a name already in use by another business on file with your state. You’ll also need to choose an ending for your business name that indicates it’s a corporation. Common choices include “Inc.,” “Corp.,” “Incorporated,” or "Corporation.”
What are an S Corp's owners called?
Shareholders. Any person or entity that owns at least one share of stock in a corporation is considered a shareholder.
What are authorized shares of stock?
The maximum amount of shares a corporation is authorized to sell. Once a share of stock is sold, it becomes an issued share.
Corporations generally get to decide whatever number of authorized shares they wish to have, and must specify that amount in their articles of incorporation. Some states base their incorporation fees or corporate taxes on the number of authorized shares, so it may be best to choose a moderate amount to begin with. An amendment can be filed at any time if authorized shares ever need to be increased.
What is a share's par value?
This is the lowest amount for which a share of a corporation’s stock can be sold. A corporation sets its own par value when filing its articles of incorporation. Most corporations have no par value or one that is very low. The par value can be changed anytime by filing an amendment.
How are S Corps managed?
S Corps are operated by officers (president, secretary, etc.), and overseen by directors. The shareholders elect directors who set a vision for the company and administer corporate decisions and policies. The directors typically elect the officers who carry out and manage day-to-day affairs. A sole person can act as shareholder, director, and all of the officers of a corporation.
What compliance formalities will I need to follow after incorporating?
Corporations have all sorts of fun requirements to keep them busy, such as: issue shares of stock to owners, record issued shares in the stock transfer ledger, adopt and maintain bylaws, hold and record minutes of initial meetings of directors and shareholders, hold and keep minutes of annual meetings, and more. All of these documents are typically kept in a compliance kit. In most states, corporations must also comply with annual report filing requirements.
What are bylaws?
Bylaws are the internal rules a corporation makes to dictate how it will be managed. Bylaws vary based on each corporation’s needs, but often include things like guidelines for the election of officers and directors, what their duties will be, when and where required shareholder meetings will be held, and how stock will be issued.
If they sound important, it’s because they are. They’re also a required part of corporate compliance, so you don’t want to get caught without them.
We take corporate compliance seriously, so the bylaws offered with our incorporation packages are customizable, allowing you to easily choose which provisions will best meet the needs of your corporation and its shareholders.
What are initial meeting minutes?
The required initial meeting of shareholders is where some of your corporation’s most important decisions ever will be made, so documenting them is a must. Topics include issuing stock, making resolutions, and reviewing and adopting the bylaws. Holding and taking minutes (notes) of this meeting are among your first corporate compliance requirements—that may sound scary, but never fear—our fully customizable minutes will get you started off on the right foot with your corporate compliance duties, guiding you through the various elements of the initial meeting and how to properly—and easily—document every important detail.
How do I get started setting up an S Corp?
Ready, set, start.