Forming an S Corporation (S Corp) involves specific requirements and considerations that businesses must meet to elect and maintain this tax status with the IRS. Here are the key steps and requirements for establishing and maintaining an S Corp:
1. Incorporate Your Business
- Formation: Begin by incorporating your business as a standard C Corporation by filing Articles of Incorporation with the appropriate state agency (usually the Secretary of State).
- Name: Choose a unique corporate name that complies with state rules and regulations.
2. Eligibility Requirements
- Shareholders: S Corps can have no more than 100 shareholders.
- Shareholder Qualifications: Shareholders must be individuals, estates, certain trusts, or tax-exempt organizations. They cannot be partnerships, corporations, or non-resident aliens.
- One Class of Stock: S Corps can have only one class of stock, meaning all shares must have the same rights and privileges.
3. File Form 2553 with the IRS
- Election Form: To elect S Corp status, file Form 2553, Election by a Small Business Corporation, with the IRS. This form must be filed within 75 days of incorporating or within 75 days of the beginning of the tax year in which you want the election to take effect.
- Unanimous Consent: All shareholders must sign the form to consent to the S Corp election.
4. Maintain Corporate Formalities
- Corporate Governance: Conduct regular shareholder meetings and keep minutes of those meetings.
- Bylaws: Adopt and maintain corporate bylaws that outline the company’s operating procedures and governance structure.
- Separate Finances: Maintain separate business bank accounts and keep corporate finances separate from personal finances.
5. Tax Compliance
- Tax Filings: S Corps must file an annual tax return on Form 1120S with the IRS. This return reports the income, deductions, credits, and other tax-related items of the S Corp. Shareholders receive a Schedule K-1, which details their share of income, deductions, and credits to report on their personal tax returns (Form 1040).
- Payroll Taxes: Shareholders who perform services for the S Corp must receive reasonable compensation, which is subject to employment taxes (Social Security and Medicare taxes).
6. State Requirements
- Business Licenses and Permits: Obtain any required business licenses and permits at the federal, state, and local levels.
- State Tax Elections: Depending on your state, there may be additional requirements or elections related to state taxes.
Considerations:
- Legal and Tax Advice: Consult with a qualified business attorney and tax advisor to ensure compliance with all S Corp requirements and to optimize tax advantages.
- Ongoing Compliance: Failure to comply with S Corp requirements could lead to loss of S Corp status and result in adverse tax consequences.
By understanding and fulfilling these requirements, businesses can benefit from the favorable tax treatment and liability protection that S Corporations offer. Each requirement plays a crucial role in maintaining the corporation’s status and ensuring compliance with both federal and state regulations.
