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What is a S corporation?
A S corporation (S corp) is a legal business element type and tax designation characterized by its pass-through tax status. S corps do without making good on corporate taxes and instead pass all corporate pay, losses, deductions, and credits through to shareholders for purposes of federal taxation. Shareholders in S corps report distributions from the business on their personal annual tax returns, and taxes are assessed at their personal annual tax rates. As a result, this allows the S corp to avoid so-called double taxation on corporate earnings.
Qualification requirements for starting a S corporation
There are several conditions that S corps must meet, as directed by the Internal Revenue Service (IRS). Some of those conditions are as follows:
S corps must be domestic corporations — they can't be unfamiliar companies.
S corps are not permitted to partake in specific business sectors, such as insurance or some monetary services.
S corps may not issue stock to in excess of 100 shareholders, and that stock must be of a single class. S corps may just offer normal stock (with casting a ballot rights); they may not offer favored stock (dividend need, no democratic rights).
S corp shareholders must be citizens or extremely durable residents of the US — they may not be non-resident aliens of the US or unfamiliar citizens.
S corp shareholders must be individuals — they may not be different corporations.
Instructions to start a S corporation
To form a S corporation, a small business proprietor must make specific strides prescribed by the IRS:
Naming. Choose a unique business name; it may not be registered to some other business substance.
Name officers. Name a directorate, a registered agent, and other corporate officers expected to run your S corp.
Schedule and hold annual meetings.Boards are required to keep nitty gritty minutes of these meetings.
Integrate your business. Document articles of incorporation with the IRS and secretary of state in your state of activity. Most states will offer an articles of incorporation form, which can be acquired from the nearby secretary of state's office. Shareholders should sign the articles of incorporation preceding recording.
Get licensed. Apply for all appropriate state, federal, and nearby business licenses and permits.
Get an EIN. S corps must document a Form SS-4 to get an employer identification number (EIN) from the IRS.
Document tax forms. S corps must document Form 2553 (Political race by a Small Business Corporation) with the IRS. Contrasted with other business formats, similar to sole proprietorships and LLCs, S corporation tax liability can be more confounded due to the stricter scrutiny the IRS applies toward these businesses. Stricter scrutiny is expected to discourage business owners from forming their ventures as S corps with an end goal to avoid taxes.
Make rules. Compose and document corporate bylaws, which govern the arrangement and evacuation of board members and other corporate officers, as well as procedures for issuing stock, scheduling meetings, and conducting board member votes.
Similar strategy can be used to form a c corp.
Issue stock. Your board should support the number of shares issued, which can be distributed as paper or electronic certificates. Notwithstanding board endorsement, you can provide prospective shareholders with a report containing a free outsider valuation of the stock, though this is not a requirement for issuing stock.
You should pay documenting fees to various authorities, both state and federal, while submitting your articles of incorporation, acquiring licenses, and getting an EIN. The cost to start a S corp varies by state, based on recording fees and state taxes, but you can hope to pay between $800 to $3,000, excluding any lawyer's fees, should you choose to enlist one.
