Introduction
Starting an S corporation (also known as an S corp) is a popular choice for small business owners due to its potential tax savings. An S corp is a type of corporation that is taxed differently than a traditional C corporation. In this article, we’ll explore the benefits and legal requirements of starting an S corp, as well as the tax advantages. We’ll also look at how to choose the right name for your S corp and provide tips on filing articles of incorporation, obtaining an employer identification number (EIN), drafting bylaws and corporate resolutions, issuing stock certificates and more.
Definition of S Corporations
An S corporation is a type of business entity that is taxed differently than other corporations. It is not a separate legal entity, but rather a tax designation for businesses that are structured in a specific way. To qualify as an S corp, the business must meet certain criteria set by the Internal Revenue Service (IRS). These include being a domestic corporation, having no more than 100 shareholders, having only one class of stock and not being a partnership, LLC or nonprofit organization.
Benefits of Starting an S Corporation
One of the primary benefits of forming an S corp is that it offers potential tax savings. All of the income and losses of the business will “pass through” to the shareholders, who then report their share of the profits and losses on their individual tax returns. This means that the business itself does not pay any taxes—only the shareholders do. Additionally, S corps can take advantage of deductions and credits that are not available to other types of businesses, such as the home office deduction and the self-employed health insurance deduction.
Steps to Form an S Corporation
Forming an S corp is a multi-step process that involves gathering documents, filing paperwork with the state, obtaining an employer identification number (EIN) and more. Here are the steps to follow when starting an S corp:
Gather Necessary Documents
Before you can begin the process of forming an S corp, you’ll need to gather all of the necessary documents. This includes the articles of incorporation, which outlines the company’s purpose and structure; the bylaws, which outline the rules and procedures for running the business; and the corporate resolutions, which authorize the board of directors to act on behalf of the corporation.
File Articles of Incorporation with the State
Once you have gathered the necessary documents, you’ll need to file the articles of incorporation with the Secretary of State in the state where you plan to form the business. The filing fee will vary depending on the state, so be sure to check with the Secretary of State before submitting the paperwork.
Obtain an Employer Identification Number (EIN)
You’ll also need to obtain an EIN from the IRS. An EIN is a unique nine-digit number that is used to identify the business for tax purposes. You can apply for an EIN online or by mail.
Hold a Meeting of Directors
Once the articles of incorporation have been filed, the next step is to hold a meeting of directors. At this meeting, the board will appoint officers, approve bylaws and resolutions, and issue stock certificates. The minutes of this meeting should be kept in the corporate records.
Draft Bylaws and Corporate Resolutions
Bylaws are a set of internal rules and regulations for the corporation. They outline the duties and responsibilities of the board of directors, officers, and shareholders. Corporate resolutions are formal decisions made by the board and should be kept in the corporate records.
Appoint Officers
At the meeting of directors, the board will appoint officers to manage the day-to-day operations of the corporation. These officers may include a president, secretary, treasurer and other positions as needed.
Issue Stock Certificates
Once the officers have been appointed, the board of directors will issue stock certificates to the shareholders. These certificates represent ownership in the corporation and should be kept in the corporate records.
Comply with Local, State, and Federal Regulations
In addition to the above steps, you’ll need to comply with local, state, and federal regulations. This may include obtaining licenses and permits, registering with the appropriate government agencies, and filing the necessary paperwork. Check with your state and local governments for more information.
Legal Requirements for S Corporations
Once you have formed your S corp, there are some legal requirements that must be met. These include:
Corporate Taxation
As mentioned above, S corps are not subject to corporate taxation. Instead, the profits and losses of the business will “pass through” to the shareholders, who will report their share of the profits and losses on their individual tax returns.
Shareholder Taxes
The shareholders of an S corp are required to pay taxes on their share of the profits and losses. Additionally, they may be responsible for paying taxes on distributions from the business, such as dividends or bonuses.
Record Keeping
Finally, S corps must keep accurate records of all transactions. This includes keeping track of income and expenses, maintaining corporate records, and filing the necessary paperwork with the IRS.
Tax Advantages of an S Corporation
In addition to the potential tax savings, there are some additional tax advantages to forming an S corp. These include:
Pass-Through Income
As mentioned above, all of the income and losses of the business will pass through to the shareholders, who will report their share of the profits and losses on their individual tax returns. This means that the business itself does not pay any taxes—only the shareholders do.
Deduction of Losses
In addition to the pass-through income, S corps can also take advantage of deductions for losses. Shareholders can deduct up to $3,000 of losses from the business each year on their individual tax returns.
Choosing the Right Name for an S Corporation
When choosing a name for your S corp, there are several things to consider. First, make sure to check with your state to see if there are any guidelines for naming a corporation. For example, some states require that the name of the corporation include the words “corporation”, “incorporated”, “limited” or “company”. Second, make sure the name is unique and not already in use by another business. Finally, check with the U.S. Patent and Trademark Office to make sure the name is available for trademark registration.
Conclusion
Starting an S corporation can be a great choice for small business owners due to its potential tax savings. There are many steps involved in forming an S corp, including gathering documents, filing articles of incorporation, obtaining an EIN and more. Additionally, there are legal requirements that must be met, such as corporate taxation, shareholder taxes and record keeping. Furthermore, there are some tax advantages to forming an S corp, such as pass-through income and the deduction of losses. Finally, make sure to choose a unique name for your S corp that complies with state guidelines and is available for trademark registration.
By following the steps outlined in this article, you can start your own S corporation and enjoy the potential tax savings and other benefits. For more information, consult with a qualified accountant or attorney.
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