If you’re planning to start your own business, why not go for an S corporation? An S corporation is a small business with special tax treatment from the Internal Revenue Service (IRS).
Setting up this kind of business involves simple steps, like choosing your business name and registered agent, filing Articles of Incorporation, and electing your company as an S corp. You can turn to a document filing service provider like Swyft Filings that can file documents for you.
Why Form An S Corp?
An S corporation is a corporation that’s taxed as a pass-through entity. This means the business doesn’t have to pay income tax, and its profits are passed on to shareholders as salaries or dividends. Because of this, S corporations tend to be more tax-efficient than other forms of business, but they can also be more expensive to operate and manage.
An S corporation might be the best choice for your business if you have less than 100 shareholders, or you plan to reinvest most or all of your profits into the company since you’re looking for capital gains rather than dividends.
Read on to learn about how to start an S corporation:
- Select A Business Name
Before you can apply for S corporation status, you’ll need a business name. The IRS will check your company’s name to ensure it complies with their guidelines. If the agency finds a potential violation of these rules, they’ll send you an approval letter and ask that you change your business name before starting operations.
Avoid choosing a generic term as part of your name (e.g., ‘coffee shop’ or ‘food truck’) because this could cause trademark issues down the line. Besides, legal fees aren’t cheap.
Your new business moniker should include all relevant information about the organization, such as its location, industry, and purpose of the operation. However, remember that some words are off-limits when registering an S corporation.
- Choose Your Registered Agent
The next step is to choose a registered agent. The role of a registered agent is to review legal documents for your business and provide proof of service. They also send you these documents if you request them.
For example, if you receive a lawsuit or other summons, the court will send it to the registered agent instead of directly to your home address or business address (if different). They then notify you that something has been filed against your company and provide instructions on how best to handle it, including payment solutions.
You can pick an individual who lives in your state as your registered agent or hire a third-party service that provides similar services at reasonable rates.
- Create An Operating Agreement
An operating agreement is a document that details the rights and responsibilities of each partner. It should include provisions for all significant decisions, including handling disputes between members, how new partners can join the business, and what happens when a partner leaves or dies.
An operating agreement can help avoid misunderstandings between partners about how much money each member will be entitled to receive from profits, who has decision-making authority over various aspects of the company’s operations (e.g., hiring employees), and other important decisions.
- File An S Corp Election With The IRS
To file for an S corporation, you’ll need a business license and tax ID number. You can apply for your EIN by going to the IRS website.
Once approved, you’ll be assigned a federal tax identification number (TIN). If you plan on doing business in more than one state, ensure each place has its TIN.
The next step is getting a business license from each city or county where your company operates. Some cities require businesses to obtain licenses before they begin operating; others allow them when they start making money, so as not to discourage startups from taking root in their jurisdictions.
Each jurisdiction will have its own rules about how much it costs and what documentation needs to accompany the application, so check with each one individually before applying for yours.
- File Your Articles Of Incorporation
Filing your articles of incorporation is the first step to creating an S corporation. Articles of incorporation are filed in the state where your business will operate, and they must include specific information about your company.
You can find forms online, at the Secretary of State’s office, or you can hire a lawyer to help you through this process.
- Issue Stock Shares To Owners And Directors
Issuing stock shares to owners and directors is a simple process. If you have multiple owners, you can issue separate shares to their names. If the corporation doesn’t have any shareholders yet but you want to issue stock share certificates now, then enter the number of shares issued.
When it’s time for your corporation to issue new stock or reissue expired or lost certificates, all existing shareholders must sign an agreement acknowledging that they’ll allow their first name and last name initial (if applicable), as well as their social security number if requested by the company where they wish to do business with.
This is for them to be able to accept payment from clients and to allow clients to be informed of who owns a particular business entity through public databases, which display essential details about businesses operating within specific geographical regions using search queries.
- Obtain Employer Identification Number (EIN)
Once you’ve decided to form an S corporation and have filed the necessary paperwork with your state, the next step is obtaining a federal employer identification number (EIN). An EIN is a nine-digit number the IRS assigns business owners for tax purposes.
To obtain an EIN, you’ll need to provide information, like your name, date of birth, and Social Security number. If you’re filing as a sole proprietor or partnership, this will be easy enough. But if you’re working with others in your small business venture, you’ll want all of them on hand so they can provide their information as well.
Once that’s done and submitted successfully, print out a copy of the form confirmation page and any other documentation it asks for in case it’s needed later on.
With an S corporation, your shareholders’ assets are protected, and you don’t have to pay federal taxes at the corporate level. However, some think that establishing an S corporation is a lengthy process. As long as you follow this guide, you’ll find that starting an S corporation isn’t so bad, after all.