Form an S Corporation
If you are considering incorporating your business within the United States, a few alternatives are readily available. One popular option is to form an S corporation, which could provide tax advantages. However, S corporation entities are not taxed under the federal income tax, which means that any
earnings or losses the firm generates are “approved through” to the stakeholders and reported on their tax returns.
Eventually, there are certain requirements you must meet to be eligible to start an S corporation in the US. So, without any further delay, let’s understand how to register an S corporation.
What is an S Corporation?
If you wish to incorporate a company in the USA, S Corporations are a perfect form of business. An S Corp is a corporation that has filed a specific tax option to the IRS, eventually, this allows the business to be tax-free, which means the firm’s income is taxed only once at the level of shareholders.
S Corps are subject to specific restrictions, like not being able to have greater than 100 shareholders or having only one type of stock. Yet, many small companies discover that the advantages surpass the drawbacks.
The S corp has certain requirements which need to be considered when applying to register an S Corporation.
- It must be a US-based company.
- It is required to have only allowable shareholders. This includes trusts, individuals, and estates.
- Should not include the other corporation’s partnerships, or non-resident aliens as shareholders.
- Should not exceed 100 shareholders.
- Should have only one stock class.
- It is not possible to be an ineligible company, like certain insurance companies, financial institutions, and national international sales corporations
These are all requirements that need to be taken care of while applying to form an S Corporation.
How to form an S corporation?
The most effective method to setup an S company is to locate an attorney or a reliable service provider who specializes in small business organizations and request them to help you with the procedure.
Such things will help you avoid the expense of time and effort when you go through the process. However, it is crucial to ensure that your firm complies with S corporation eligibility laws set by the IRS, including being a domestic firm with the maximum number of shareholders allowed.
One of the first things to do is to submit the Articles of Incorporation with the State’s Secretary of State Office, as this will typically require an application fee. Official information about the company is provided in the articles of incorporation.
The documents contain details like:
- The name and address of the company
- Directors, officials, and stockholders
- The goal of the company
- The quantity of stock to be issued
Once your Articles of Incorporation have prevailed, you might be required to create bylaws for your firm.
To form an S Corp, it is crucial to first establish a corporation or an LLC. Once the business has been established, to obtain S corporate status Form 2553 has to be filed with the IRS. This form must be signed by the shareholders and submitted to the IRS within 75 days from the beginning of the tax year. You might need to submit extra forms, according to state and municipal tax authorities.
You have to give your company a name when you want to form a S Corp. The name must be specific to your company. Once the S Corp is set up, you may include “Inc” or “Incorporated” at the conclusion of the name of your company.
Although, you’ll need to be able to provide Employer Identification Number (EIN) details for the application form. Don’t forget to apply for an EIN at the IRS if you don’t have one already.
Lastly, once you’ve obtained your EIN, you can set up a corporate bank account.
Why choose to setup an S Corporation?
S corporation is a type of business that has opted for a specific status in taxation with the IRS as well as being taxed following Subchapter C of the Internal Revenue Code (IRC).
S corporations have the same level of liability to their owners (called shareholders) as C-corporations and owners do not typically have personal responsibility for liabilities and business debts but S corporations are taxed through pass-through.
S corporations aren’t required to pay taxes at the corporate level. They submit an annual informational tax return, but the business’s income and loss are recorded on the personal tax returns, and the taxes due are paid on an individual tax level.
Key features that define S Corp
1. An entity that passes through
S Corp is considered to be a pass-through business similar to an LLC meaning that income earned by the company is taxed at an individual level. S corp is also able to provide financing options and benefits that draw and keep key employees.
2. Management and Ownership
The shareholder requirement is strict that must be met for an S company to be created and managed.
Here are some of the key features to be aware of:
- The owners of an S company are the owners of the corporation.
- Limit of shareholders to 100 shareholders
- Shareholders who can be eligible for S corp could be natural individuals, estates and certain trusts.
- Single-member LLCs that haven’t been chosen for taxation as corporations
- Additionally, S corporations may have specific restrictions on ownership that other kinds of corporations don’t have.
- Stakeholders can’t be considered an “ineligible corporation” as defined in the U.S. Code SS 1361. Corporate and partnership entities are not eligible.
- S company is limited to only one type of stock.
- Only U.S. citizens, permanent residents, certain trusts, estates, tax-exempt entities, and trusts can own stock.
3. Protection from liability
S Corporation provides limited liability protection for its shareholders. Though, the limited liability protection implies that the shareholders aren’t personally accountable for the liabilities and debts that the S corp incurs.
This differs in a sole-proprietorship or general partner, in which the shareholders are personally accountable for the liabilities and debts of the company.
4. Corporate formalities
The formalities associated with an S corp, are exactly similar to that of other companies. It is the same for holding monthly board sessions, recording minutes, and issuing shares to shareholders.
There are distinct requirements for S corp, i.e. it must file an additional tax return (Form the 1120S) and are subject to tax rules that are different as compared to other companies.
Compliance with filing requirements to setup an S Corporation
U.S. Income Tax Return
If your company is registered with an S corporation, you’ll have to submit Form 1120S, also known as that’s the U.S. Revenue Tax Form that is required for an S Corporation.
This form has to be submitted every year and must be submitted by the 15th day in the third month following the close of your tax year. For instance, if the tax year ended on December 31 then your Form 1120S will be due by March 15 of the next year.
State Tax Returns
Alongside the taxes that are filed by the federal government, the majority of S companies will also have to prepare the State tax return. The requirements differ by state, so it’s best to consult the tax authority of your state to determine what is required.
The process of filing the S corporate tax return can be a bit complicated. It’s therefore best to seek out professionals and tax experts well-versed in the process.
Taxes on employment
The IRS demands S corporations deduct the tax from their employee’s wages and transfer them in cash. Shareholders of an S corporation aren’t considered employees, therefore they are not subject to these taxes.
However, the IRS does require S corporation shareholder-employees to pay Social Security and Medicare taxes on their share of the corporation’s income.
Excise tax
If your S company is involved in specific industries, there is a chance that you will have to settle an excise tax. The excise tax is a form of federal tax applicable to specific products and services, like alcohol, gasoline, and tobacco.
The requirements for paying the excise tax differ by sector, therefore you’ll need to inquire with the IRS and your tax advisor to determine whether your business is taxed under this tax.
S corp vs C corp
S corp tax benefits are the most noticeable in the difference between S corporations as well as C corporations. S corporation’s income is taxed at the level of the shareholder and in contrast to corporate levels. This may provide tax benefits to shareholders since they are in a position to avoid double taxation of their earnings.
However, on the other hand, it is a C-corporation will be considered the most popular kind of company that is taxed as an independent business entity on a corporate scale.
How to decide if incorporating as an S Corp is right for your business?
There are many reasons entrepreneurs choose to Setup an S corporation business.
A few of the benefits include:
- Taxation on pass-throughs: S corporations are taxed as pass-through companies, which means that the income of the company is taxed at an individual level instead of on a corporate scale. This may reduce tax burdens for owners.
- Flexible: S corporations have greater flexibility than other kinds of companies when it comes to the distribution of profits and losses among shareholders. This allows them to reduce taxes and increase profits.
- Limit liability: Shareholders of S corporations are not liable for any liability. They do not have to be personally responsible for the company’s debts and obligations. This helps protect shareholders from being held responsible for the company’s debts, if the company goes into the position of being in debt, or sued.
- Transferring ownership is simple: Through the selling of shares, ownership can be easily transferred.
- Credibility: S corporations could be seen as a more professional and genuine organization than general partnerships or sole proprietorships.
- Tax savings from self-employment: Since proprietors who are working in the company are regarded as workers, an S corp might provide self-employment tax savings.
Conclusion
If you’re looking to begin your own business in the USA and incorporate with S Corp may be the most suitable choice. S Corporations are considered pass-through entities that provide stockholders with minimal liability protection. S corporations are not liable for corporate income tax, and hence the earnings generated by the organization are taxed at the individual level.
You must follow the rules and submit the form to the IRS correctly if you want to create an S corporation. When establishing an S corporation, we at Odint Consulting can help you comply with the legal requirements and can further assist you in filing Form 2553 with the IRS to elect S Corp status.
FAQ’s
The term “S corporation” refers to the entity that is an S firm named after Subchapter S from Chapter 1 of the Internal Revenue Code (IRC). Thus the tax is imposed under a section of the IRC.
Utilize Form 1120-S to record the income and losses, gains and deductions, as well as credits, etc. of any domestic or foreign entity in any tax year that is which is covered by an option to become an S corporation.
To form an S corporation, first, create Articles of Incorporation with an LLC or C-corporation.
S-corporation status could provide significant tax savings while also permitting corporations to sell shares to shareholders or LLCs to continue operating their LLC structure.
The instructions for Form 2553 provided by the IRS contain all the specifics regarding eligibility. Entrepreneurs ought to thoroughly examine the qualifying standards and compare them to the particulars of their organizations before taking any action.
