How to Start S | Lovie — US Company Formation

Starting an S Corporation (S Corp) is a strategic move for many US businesses seeking pass-through taxation and potential self-employment tax savings. Unlike a traditional C Corporation, an S Corp allows profits and losses to be passed through directly to the owners' personal income without being subject to corporate tax rates. This election is made with the IRS and requires specific eligibility criteria to be met. Understanding the nuances of S Corp formation is crucial for maximizing its benefits while ensuring compliance with federal and state regulations. Forming an S Corp involves two primary steps: first, establishing a legal business entity (like an LLC or C Corp) at the state level, and second, filing Form 2553, 'Election by a Small Business Corporation,' with the IRS. While the IRS handles the federal election, each state has its own rules and filing procedures for business entities. Lovie simplifies this complex process, guiding you through state registration and the federal S Corp election to ensure your business is set up correctly from the start.

Understanding S Corp Eligibility Requirements

Before you can even think about how to start an S Corp, you must ensure your business meets the strict eligibility criteria set forth by the IRS. These requirements are designed to limit S Corp status to smaller, closely-held businesses. The primary qualifications include: **1. Domestic Entity:** Your business must be a domestic entity, meaning it's formed and organized in the United States. This includes LLCs and C Corporations formed in any of the 50 US states or the District of Columbia. **

Must be a domestic US entity (LLC or C Corp).
Limited to 100 shareholders, primarily individuals and certain trusts/estates.
Shareholders must be US citizens or resident aliens.
Only one class of stock is permitted.
Certain financial and insurance companies are ineligible.

Step 1: Form Your Legal Business Entity

The crucial first step in learning how to start an S Corp is to establish a legal business entity at the state level. The IRS does not directly form S Corps; rather, it allows eligible LLCs and C Corporations to elect S Corp tax status. You can choose to form either an LLC or a C Corporation as your base entity. The choice often depends on your long-term business goals, liability protection needs, and how you plan to structure ownership and operations. **Forming an LLC:** A Limited Liability Co

Choose between forming an LLC or a C Corporation.
File formation documents (Articles of Organization for LLCs, Articles of Incorporation for C Corps) with your state.
Pay state filing fees, which vary by state (e.g., Texas $300 for LLC, Delaware $89+ for C Corp).
Appoint a registered agent in your state of formation.

Step 2: File IRS Form 2553 for S Corp Election

Once your LLC or C Corporation is officially formed at the state level and you've confirmed your business meets all eligibility requirements, the next critical step in learning how to start an S Corp is to file IRS Form 2553, 'Election by a Small Business Corporation.' This form is your official request to the IRS to be recognized as an S Corporation for tax purposes. It's imperative to file this form accurately and within the designated timeframe to ensure your election is accepted. **Filing D

File IRS Form 2553, 'Election by a Small Business Corporation'.
The deadline is typically 2 months and 15 days after the start of the tax year.
All shareholders must consent to the election and sign the form.
An EIN is required before filing Form 2553.
Mail the completed form to the IRS Service Center specified in the instructions.

S Corp vs. LLC vs. C Corp: Key Differences

Understanding how to start an S Corp often leads to questions about its relationship with LLCs and C Corps. It's essential to clarify that an S Corp is a tax election, not a legal business structure itself. Your business will first be established as either an LLC or a C Corp at the state level, and then you elect S Corp status with the IRS. **LLC (Limited Liability Company):** An LLC is a legal entity structure offering liability protection and operational flexibility. By default, the IRS taxes

S Corp is a tax election, not a legal structure.
LLCs and C Corps can elect S Corp status.
LLCs offer flexibility; C Corps offer easier capital raising.
C Corps face double taxation unless they elect S Corp status.
S Corps offer pass-through taxation and potential self-employment tax savings.

Benefits and Drawbacks of S Corp Status

Electing S Corp status can be highly advantageous for many US businesses, but it's not without its complexities and potential downsides. Understanding these pros and cons is vital before deciding if this tax election is the right move for your company. **Benefits:** * **Pass-Through Taxation:** The most significant advantage is avoiding the double taxation inherent in C Corporations. Profits and losses are reported on the owners' personal tax returns, and the business itself is not taxed at

Avoids C Corp double taxation.
Offers potential self-employment tax savings on distributions.
Requires strict adherence to eligibility rules.
Involves more complex tax filings and potential IRS scrutiny.
State-specific S Corp rules may apply.

Frequently Asked Questions

What is the difference between an LLC and an S Corp?: An LLC is a legal business structure providing liability protection and operational flexibility. An S Corp is a federal tax election that an eligible LLC (or C Corp) can make. An LLC taxed as an S Corp gets pass-through taxation and potential self-employment tax savings.
Can I form an S Corp directly?: No, you cannot form an S Corp directly. You must first form a legal entity like an LLC or a C Corporation at the state level. Then, you file IRS Form 2553 to elect S Corp tax status.
How long does it take to get S Corp status approved?: After filing Form 2553, the IRS generally processes it within 60 to 90 days. You will receive a confirmation letter if your election is accepted. If you need S Corp status effective immediately, consult with a tax professional about expedited options or late election relief.
What is a 'reasonable salary' for an S Corp owner?: A 'reasonable salary' is the amount the IRS considers appropriate compensation for services rendered by an owner-employee, based on factors like industry standards, job duties, and experience. It's not a fixed number and requires careful justification to avoid penalties.
Can a non-US citizen be a shareholder in an S Corp?: No, non-resident aliens cannot be shareholders in an S Corp. Only US citizens and resident aliens are permitted to hold shares. This is a strict IRS requirement for S Corp eligibility.

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