If you're looking to start a small business, you may want to consider setting up an S corporation, or S Corp. This type of business structure offers several advantages, including limited liability protection and tax benefits. Here's a step-by-step guide on how to set up an S Corp in the United States.
What is an S Corp?
An S Corp is a type of corporation that allows business owners to enjoy the benefits of limited liability protection without paying corporate income tax. Instead, the company's profits and losses are passed through to the shareholders, who report them on their individual tax returns.
To qualify as an S Corp, your business must meet certain criteria, including having no more than 100 shareholders and only issuing one class of stock. You'll also need to file Form 2553 or Form 8832 with the IRS to elect S Corp status.
1. State Registration
The first step in setting up an S Corp is to register your business with the state where it will be located. Each state has different requirements for registering a business, but in general, you'll need to file articles of organization/incorporation and pay a fee. In most cases, you will start with an LLC (or corporation) entity and then make the election later to take S Corp status.
You'll also need to choose a business name that is unique and not already in use. Most states have an online database where you can search for available names.
Once your business is registered with the state, you'll receive a certificate of incorporation or a similar document that confirms your business's existence.
2. Federal Registration
After registering your business with the state, you'll need to obtain an Employer Identification Number (EIN) from the IRS. This is a unique identifier for your business that you'll use for tax purposes.
To apply for an EIN, you can fill out the online application on the IRS website. You'll need to provide information about your business, including its name, address, and type of entity.
3. S Election
After registering with your state and obtaining your EIN, you will need to file Form 2553 if you registered as an LLC or Form 8832 if you registered as a corporation to make your S Election final. Some states require a separate S Election be filed, but most states accept your federal election and you just file as an S Corp. Make sure you verify your state’s requirements to ensure your S Corp is compliant and setup properly.
Formalities and Paperwork
Setting up an S Corp also involves several formalities and paperwork. Here are a few key documents to maintain in your corporate books:
Create corporate bylaws that outline how your business will be run, including the roles and responsibilities of the board of directors and officers.
Make an accountable plan to reimburse owners for personally paid expenses like your home office and personal automobile used for business purposes.
Hold an initial meeting of the board of directors to adopt the bylaws, elect officers, and issue stock certificates.
Obtain any necessary business licenses and permits, depending on the type of business you'll be running.
Open a business bank account and obtain a business debit/credit card.
Conclusion
Setting up an S Corp can be a complex process, but it offers several benefits for small business owners. By following these steps and working with a qualified professional, you can ensure that your business is set up correctly and enjoy the advantages of limited liability protection and tax benefits. Remember to comply with state and federal regulations and seek professional advice as needed to ensure that your S Corp is in good standing.
We know starting your business can be stressful, that’s why we offer a one-stop shop for choosing the right entity, getting registered, and setting up your bookkeeping. Schedule a free consultation today.