An S Corporation (S Corp) is a special tax designation by the IRS, not a business structure type like an LLC or C Corp. Businesses that qualify can elect S Corp status to potentially avoid double taxation, a common concern for C Corporations. This election allows profits and losses to be passed through directly to the owners' personal income without being subject to corporate tax rates. Understanding the requirements and the process is crucial for business owners looking to optimize their tax situation. Setting up an S Corp involves two primary steps: first, forming a legal business entity such as an LLC or C Corp with your state, and second, filing the appropriate election with the IRS. While Lovie can help you form your LLC or C Corp efficiently in all 50 states, the S Corp election is a federal tax matter handled directly with the Internal Revenue Service. This guide will walk you through the essential steps and considerations for making this election.
An S Corp is a tax election, not a legal entity type. To become an S Corp, you must first establish a business entity recognized by your state, typically an LLC or a C Corporation. Once your entity is formed and active, you can then request S Corp status from the IRS. The primary advantage of S Corp status is the potential to reduce self-employment taxes. Owners can be paid a 'reasonable salary' as an employee, subject to payroll taxes (Social Security and Medicare), while remaining profits dist
Before you can elect S Corp status, you need a foundational business entity. The most common choices are a Limited Liability Company (LLC) or a C Corporation. Forming an LLC is often favored for its flexibility in management and taxation, while a C Corp offers more traditional corporate structures and easier access to capital through stock issuance. Lovie can assist you in forming either an LLC or a C Corp in any of the 50 US states, including processing necessary state filings and ensuring comp
The core of electing S Corp status lies in filing Form 2553, Election by a Small Business Corporation, with the IRS. This form requires detailed information about your business, including its name, address, Employer Identification Number (EIN), the date and state of incorporation, and details about shareholders. All shareholders must consent to the election by signing the form. You can file Form 2553 online through the IRS portal or by mail. For mailed submissions, ensure you send it to the corr
Electing S Corp status fundamentally changes how your business is taxed. Instead of paying corporate income tax, the profits and losses are 'passed through' to the shareholders' personal tax returns. This avoids the potential double taxation that can occur with C Corporations, where profits are taxed at the corporate level and then again when distributed as dividends to shareholders. However, S Corp owners who actively work for the business must be paid a 'reasonable salary' as an employee. This
It's essential to distinguish between an S Corp, an LLC, and a C Corp. An LLC is a legal business structure offering liability protection and pass-through taxation. A C Corp is also a legal structure, but it's taxed separately from its owners, potentially leading to double taxation. An S Corp, as previously discussed, is a tax election that can be applied to an LLC or a C Corp. This means an entity can be a 'California LLC taxed as an S Corp' or a 'Delaware C Corp taxed as an S Corp'. The choic
Maintaining S Corp status requires ongoing attention to both state and federal requirements. At the state level, your underlying entity (LLC or C Corp) must remain in good standing. This typically involves filing annual reports and paying annual fees, which vary by state. For example, California requires an annual Franchise Tax of at least $800 for LLCs and corporations, in addition to a Statement of Information filing every two years. In contrast, states like Wyoming have no state income tax an
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