How to Start an S Corp

Woman looking over paperwork to start an S corporation.

As a business owner you may have wondered,how do I start an S corporation?You can start anS corporation (S corp)by forming a limited liability company (LLC) or a corporation and electing S corp status from the IRS by filing Form 2553 Election by a Small Business Corporation when you apply for your Employer Identification Number (EIN). S corps can provide significant tax savings and have limited liability protection. OurHow to Start an S Corpguide will help you navigate through common S corp questions.

An S corp is an Internal Revenue Service (IRS) tax classification for federal and state income taxes with pass-through taxation and is not a business structure. The S corp tax status is used to reduce a business’s tax burden.

We will explain when you should choose S corp status and the steps that are needed to start an S corp in ourHow to Start an S Corpguide below.

Recommended:If you’re making at least $80,000 in net earnings, an S corp may offer youtax advantages. LetNorthweststart your S corp for you today.

Factors to Consider Before Starting an S Corp

Before you form an S corp, you have to consider the following factors on how to start an S corp:

Is an S corporation the best strategy for your business?
S corporation requirements and restrictions
Why an LLC is the best business structure for the S corp tax status
Are S corp tax benefits right for you?

Key Takeaways on how to start an S corp:

Form a formal business structure, such as an LLC or corporation

Elect S corp status from IRS Form 2553 (in NYC also form CT-6)

Meet all S corp IRS requirements

Must be U.S. citizen or permanent resident alien

Owners must pay themselves a reasonable salary

Business should at least make $80,000 in profits with $20,000 in distributions

Is an S Corporation the Best Strategy for Your Business?

For help with choosing the right structure for your business (LLC vs corporation), visit ourChoosing a Business Structureguide.

Businesses that elect S corp status will need to hirepayrollandaccounting services.

S Corporation Requirements

TheIRS requiresthat businesses that elect the S corp status:

Have 100 shareholders or less
Are domestic LLCs or corporations
Issue only one class of stock
Shareholders are U.S. citizens or permanent resident aliens
Are owned by private individuals

Read ourS公司是什么to learn more about S corps.

Why an LLC is the Best Structure for an S Corp Tax Status

As entrepreneurs, we believe that starting an LLC is the best way for forming an S corporation because any advantages of forming a corporation are negated by S corp restrictions. Also, LLCs are easier to maintain than corporations.

The only state where this may not be true is in New York due toLLC publication requirementsin the state.

Are S Corp Tax Advantages Right for You?

You need to know if the S corp tax status versus a default LLC tax status will be better for your business. To fully understand the tax advantages of an S corp, read ourS corp vs LLCguide.

How to Form an S Corp

If you’re considering forming an S corp, you should know that anS corporation is a tax classification under Subchapter S of the Internal Revenue Service (IRS)for fedral income tax and state tax. S corp business owners elect this tax status for either an LLC or a corporation for its tax benefits. Corporations with a C Corp IRS tax classification have double taxation (business is taxed and shareholders are taxed again on their personal income tax return) and LLCs have pass-through taxation (all losses and profit — credits, distributions, deductions — pass directly to the owner).

An S corp requires business owner(s) to have areasonable salarybased on their position and the appropriate market compensation to qualify for this type of tax classification. This is also why the IRS pays closer attention to businesses who elect an S corp tax status.

Here are some S corp tax advantages:

S corps are not taxed at the business levelsince earnings and losses, known as distributions, pass through to the owner(s)/shareholders after operational costs are paid (unlike in a C corp)
Business owner(s) are considered employeesand pay on their salaryemployment taxesandincome tax
Distributions, which are net profits (profits after operational costs, deductions, credits, income) only payincome taxon each individual owner’s personal income tax return at their tax bracket. This is where the tax savings occur since there is no employment tax paid on this portion!

There are two main ways to start an S corp:

By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
By forming a corporation and electing S corp status from the IRS

You will have to complete and fileForm 2553from the IRS.

We recommendnot starting a corporationwith the S corp tax status because the S corp negates all of the benefits of a corporation.

Steps to Forming an LLC and Electing S Corp Status

Starting an LLC and electing S corp tax status is easy. You can use our step-by-step guides to start an LLC with the S corp status yourself, or you can hire a service provider likeNorthwestto do it for you.

Recommended:If you have an existing LLC, visit ourHow to Convert an LLC to S Corpguide.

Choose your state from the list to get started:

五个基本Steps to Start an LLC and Elect S Corp Status:

Step 1:Name Your LLC

Step 2:Choose a Registered Agent

Step 3:File the Articles of Organization

Step 4:Create an Operating Agreement

步骤5:Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Name Your LLC

You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.

OurBusiness Name Generatorand ourHow to Name a Businessguide are free tools available to entrepreneurs that need help naming their business.

Step 2: Choose an LLC Registered Agent

Your LLCregistered agentwill accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 3: File Your LLC's Articles of Organization

TheArticles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 4: Create an LLC Operating Agreement

AnLLC operating agreementis a legal document that outlines the ownership and member duties of your LLC.

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步骤5:Get an EIN and Complete Form 2553 on the IRS Website

AnEINis a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.

EINs are free when youapply directly with the IRS.

Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link toForm 2553小巴士,选举iness form.

Visit ourForm 2553 Instructionsguide for detailed help with completing the form.

This is the form to elect S corp tax status for your LLC:

Steps to Take After Forming an S Corp

Once you formalize your S corp, consider adding a business phone line to protect your personal information withphone.com.

If you need to build yourS corp credit, read our guide on how tobuild business creditand get a business credit card throughBILL.

Start an S Corp FAQ

What is an S corp (Subchapter S)?

AnS corporation(S corp) is a tax designation for which an LLC or a corporation can apply for through the IRS by completing and filingForm 2553Election by a Small Business Corporation.

What is the difference between an S corp and C corp?

C corporations (C corps) and S corporations (S corps) are two different types oftax statuses. S corps and C corps are often misunderstood to be business structures.

S Corporation

In an S corp, the business itself is not taxed.

An S corp allows business owners to become employees of the business and can reduce the tax burden under the right circumstances. LLCs and corporations can elect an S corp status. S corps have pass-through taxation, meaning that all profits are passed down to the members as in a default LLC. The members (owners) of LLCs are not salaried employees like in an S corp, so profits pay both income taxandself-employment taxes on the shareholder's personal income tax. In an S corp, the owners or members save on employment taxes due to only the salary being subject to self-employment taxes; the distributions only pay income tax.

Learn more in ourS corp vs C corpguide.

C Corporation

在C公司,业务是按统一费率(currently 21%). A business taxed as a C corp faces double taxation because after the business is taxed, the shareholders are then taxed on their distributions on their personal income tax. For some corporations, the benefits can outweigh the disadvantages of double taxation.

Learn more in ourS corp vs C corpguide.

Is an S corp an LLC?

No. An S corp is a tax status that an LLC or a corporation can elect to report a business's federal and state income taxes.

How do you form an S corp?

You can form an S corp by filingForm 2553with the Internal Revenue Service (IRS).

What are the requirements for an S corp?

S corps must meet four requirements:

They can have no more than 100 shareholders.
All shareholders must be U.S. citizens who are private individuals (not other business entities).
Shareholders cannot be nonresident aliens.
The business may only issue one class of stock — this means all members must have the same distribution amount.

What are the tax benefits of an S corp?

Owners of S corps are considered employees of their company and they can save thousands of dollars on self-employment taxes as a result.

Are taxes for LLCs and S corps the same?

No. The default taxes for an LLC and taxes for an S corp are not the same.

With anS corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.

With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income taxandself-employment tax on the entire amount.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax return.However, for S corps, the deduction doesn’t apply to profits paid out as wages.

What is a reasonable salary for an S corp?

Unlike a default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits,owners of S corps are considered employeesof the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.

股份公司所有者必须获得“合理的”salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.

What is a distribution?

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

What is pass-through taxation?

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.

What is the S corp tax rate?

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s net profits. This rate depends on each owner’s personal income tax bracket.

Can I still use my DBA name if I elect to be an S corp?

LLCs and corporations that operate under a doing business as (DBA) name can choose the S corp election.

How do I pay myself from my LLC?

How LLC owners pay themselves depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity.

In a single-member LLC (SMLLC) or multi-member LLC (MMLLC), you can pay yourself:

a distribution that passes through to your individual tax return, or
a reasonable salary and distribution as an S corp

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