Introduction
Most entrepreneurs focus on achieving two goals while deciding on the structure for their business – paying off the taxes based on individual tax returns and protecting their personal assets at the time of settling business claims. With these two objectives in mind, an S Corporation becomes a straightforward choice other than LLCs. Though the popularity of the former has dropped over the last few years, it is still considered appropriate for certain businesses.
What is an S Corporation?
When an essentially regular corporation (also called a C Corporation) applies for the tax status of an “S corporation” by signing and filing IRS Form 2553, it becomes an S Corporation after getting the approval from the concerned governmental agencies. The major benefit of forming an S Corp is that it allows you to pay taxes on the basis of your individual tax returns while providing protection against your personal liability at the same time. In this way, it also helps you elude double taxation – an unavoidable aspect of a C Corporation.
There are some criteria to set up an S Corporation in the United States. Apart from the requirement of being a domestic corporation, it is mandatory to ensure that the total number of shareholders does not exceed 100. In addition, it is also important to ensure that all the shareholders are eligible and that there is only one particular class of stock. Also, each shareholder needs to be either a US citizen or a resident. Further, there are additional criteria that need to be met in order to get the approval to register as an S Corp. Various steps to register an S Corporation are discussed below.
Steps to Form an S Corp
- Set up a Corporation or an LLC: You can set up a Corporation or an LLC at the state level. In order to do so, all you need to do is reach out to the secretary of the state in which you are planning to set up a C Corporation with the required documents. You will also need to pay the filing fee for the purpose.
- Get an Employer Identification Number: The next step, after forming your LLC or Corporation at the state level, is to obtain an employer identification number (EIN). It can be done by filing Form SS-4 with the IRS. You can either apply for an EIN on the internet, over the phone or via mail.
- File Form 2553: After getting an IRS form, you will need to enter the following information:
- The name of the Company
- EIN number
- Company address
- State of incorporation and date of incorporation
- The information related to fiscal tax year
- Shareholder or member information
- An effective date for the election of S-Corp
After the submission of form 2553, you will get a response from the IRS within 60 days. Receiving the acceptance letter from the IRS means that your company has become an S Corporation.
The decision to form an S-Corp is oftentimes a complicated decision. Given the intricacies of details of various rules and regulations, it is a good idea to consult a professional or an expert who is aware of all the aspects of forming an S-Corp. By doing so, you can keep various risk factors at bay and set up an S Corporation successfully.
