S Corp Formation
When embarking on a business quest, it is apparent to prioritize things that matter, including activities that bring money. But before you go full throttle, you need to legalize your business by selecting an apt legal structure. Unfortunately, that is the area where most entrepreneurs struggle.
Your business structure defines how much taxes you will pay and the types of compliance you will address. If lower taxes are what you prefer, choosing S corp as a legal structure can be an ideal fit. Read on to discover everything about S Corporation formation and its legalities alongside process and paperwork.
What is an S corporation?
An S corporation (or S corp) gets its name from the fact that it does not attract any form of taxes, including corporate income tax. The income or loss it generates makes its way to shareholders, who will then be taxable under federal law. That is why it is often acknowledged as “pass-through taxation. Shareholders attract taxes (personal income tax) on behalf of the firm, safeguarding corporate income from double taxation.
A 10 Steps Guide to S Corp Formation
S Corp formation in the US is a matter of navigating systematic legal steps, which include:
Step 1: Select an Apt Business Name
Before you file an application concerning S Corp formation, choosing a distinct and legal business name is vital. Head to the local secretary of state website to determine whether or not the proposed name is genuine. Make sure the selected name abides by naming regulations, which emphasize the avoidance of similar and obscene terms that hinder the public interest and create confusion.
If you find name selection or reservation overwhelming, go for the “doing business as” (DBA) name and get it registered with your state as well.
Step 2: File articles of incorporation
Once you are done with naming formalities for S corp formation, file charter documents like articles of incorporation with competent authority viz. IRS. Typically, this document is not excessively texty, boasting details that differ state-wise. However, in general, it reflects the following information:
- Business details and its purpose
- Business place address
- The name and address of individuals dealing with incorporation legalities.
- The ownership structure and number of shares stand eligible for issuance.
By default, your business shall carry a legal status viz. C corp. Upon fulfilling norms concerning S corp formation, you can proceed with the paperwork formalities. You can visit the respective secretary of state’s office to secure the articles of incorporation form. You must fill out this form with legitimate details and submit it alongside the applicable fee.
Step 3. Issue stock after S Corp formation
After S corp formation, issuance of stock of new corporations must be carried out via paper or electronic certificates. Notably, the stock’s issuance should be limited to 100 shareholders as a part of compliance. Besides, consider the following norms to stay compliant.
- S Corps cannot issue the preferred stock and hence it must stick to the common stock, which must be issued via voting rights.
- S Corp shareholders should belong to the US and be a natural person.
You can assure shareholders of the prospective share value by providing them with an independent third-party report, albeit it is not mandatory at all.
Step 4. Elect BODs and appoint officers
Once you reinforce the shareholding status, it is time to elect the BODs i.e. board of directors, who will cater to managerial affairs and decision-making. All S Corps are eligible to accommodate at least one director. The BODs reserve the right to appoint individuals to oversee the daily operation.
Step 5. Meet IRS eligibility requirements
All S Corps are required to meet norms formulated by the Internal Revenue Service (IRS). Firms planning to adopt S corp as a new legal structure should make significant changes to become eligible.
Notably, the S Corp can be incorporated as an overseas company, meaning it must stay a domestic corporation. Some companies belonging to domestic international sales and finance sector stand ineligible to hold S Corp status.
Step 6. Obtain an EIN i.e. Employer Identification Number
In order to stay aligned with federal tax norms, partnerships, and corporations must secure EIN without fail. EIN helps with a number of endeavors that influence the company’s growth. These include:
- Establishing payroll for S corp employees
- Opening a business bank account
- Building credit
- Securing industry-based approvals and other licenses
File IRS Form SS-4 to secure EIN in the US.
Step 7. Elect S corp status
Once your S Corp formation comes alive, file Form 2553 with the IRS to secure the S corporation status. Prior to filing, be sure to enclose the signatures of all the shareholders in the form. Apparently, since this business structure does not attract any taxes directly, they have to face stringent IRS compliances.
Step 8. Apply for business licenses
Once you’ve met federal norms, you must cater to the tax and legal obligations of the states where you plan to do business. For instance, California requires entities to file separate paperwork for S Corp formation. These include the Operating Agreement, Articles of Organization, and Initial Statement of Information.
Additionally, most states have a separate set of rules for paying taxes with varied rates. Adherence to local licenses and tax laws is paramount for S Corps to keep their tax status intact. Get in touch with a professional firm like Adviso to have a better understanding of state rules for S Corps.
Step 9. Formulate S Corp bylaws
S Corp cannot become legally viable unless it has written and filed its corporate bylaws. These bylaws refer to norms that govern several facets of S-Corp, conferring must-needed legal gravity. The BODs are liable to oversee such undertaking. By-laws entail various key norms concerning decision-making, removal of board members, issuing stock, and scheduling annual meetings.
Step 10. Schedule and Hold Annual Meetings
Like C corps, S corps are liable to convene board and shareholder meetings at regular intervals and document the same without fail. These minutes serve as reliable evidence of decisions taken by the board members regarding but not limited to appointment or removal of board members, partnering with new vendors, introducing of new services or products, etc.
Generally, in most states, a quorum must be held in the presence of shareholders constituting over 50% of the S corp’s shares. However, this threshold can be increased to any level and the same must be reflected in the corporation’s bylaws.
Conclusion
As you can see the S Corp Formation is all about dealing with plenty of compliances, which might appear overwhelming to new entrepreneurs. S Corp is certainly a worthwhile structure but it might lead you to scratching your head when it comes to incorporation. That is why we recommend you to connect with Adviso and proceed with a piece of mind. Adviso is a top-tier agency fueled by a vast network of seasoned professionals well versed in regulations, incorporation, and global endeavors. Whether you need a quick approval or a set a legally viable business from a scratch, Adviso has got you covered.
Read Our Article: Company Registration in Texas: A Newbie’s Guide
