Business owners often wonder which business entity makes the most sense for their situation. An S Corporation (S Corp) is a popular choice because it offers both personal liability protection and certain tax benefits for corporate and personal income tax.
This article covers the basics of becoming an S Corporation, including the election process for business tax purposes.
1️⃣ How to Become an S Corporation
Two business entities can elect to file business taxes as an S Corporation: Inc and LLC. The election process is the same for both.
1.1) Complete IRS Form 2553 Within Two (2) Months and Fifteen (15) Days
The business must complete IRS Form 2553 (Election by a Small Business Corporation) within a certain timeframe.
For current businesses: no more than two months and 15 days after the beginning of the tax year when the election goes into effect. For new LLCs and C Corporations: two months and 15 days from the date of formation to choose the S Corporation election status.
1.2) What Happens If You Miss the Deadline for the S Corp Election
If you miss the deadline, you will follow these tax guidelines for the current tax year:
- Corporations are taxed as C Corporations.
- Single-member LLCs are taxed as sole proprietorships.
- Multi-member LLCs are taxed as partnerships.
1.3) Requesting a Late Election from the IRS
If you miss the timeframe to file Form 2553, you can request a late election from the IRS.
2️⃣ S Corporation Business Operations
S Corporations operate a little differently from other business entities.
Here are the key differences to consider.
2.1) How to Pay Yourself as an S Corp Owner
One of the benefits of an S Corporation is the lack of double taxation. It’s important that owners pay themselves correctly to avoid triggering an audit from the IRS.
Any S Corporation owner who is active must pay themselves a reasonable salary. All employee-owners must take a reasonable salary via W-2. The remaining profits are then taxed on your 1040, saving you payroll tax on the owner-draw portion not paid as a W-2 salary.
2.2) Ongoing Compliance Requirements for S Corporations
Both LLCs and C Corporations may elect S Corporation status if they meet IRS requirements. However, the process can be complicated. The ongoing compliance requirements vary from state to state, but here are the basics:
LLC Requirements
- ✅ Initial Filing: File articles of organization to form an LLC. Pay filing fees.
- ✅ Initial Report: Some states require a statement of information with the initial filing.
- ✅ Publication Fees: Some states charge a publication fee.
- ✅ Annual Report: Most states require an annual report to maintain LLC status.
- ✅ Maintaining a Registered Agent: An LLC is required to record a Registered Agent with each state in which they do business. This person (or entity) is notified in the event of a lawsuit.
C Corporation Requirements
- ✅ Initial Filing: File articles of organization to form a C Corporation. Pay filing fees.
- ✅ Initial Report: Some states require an initial report.
- ✅ Publication Fees: Some states charge a publication fee.
- ✅ Annual Report: Most states require an annual report.
- ✅ Annual Meetings: C Corporations are required to hold annual meetings.
- ✅ Meeting Minutes: A written record of meetings is required.
- ✅ Maintaining a Registered Agent: A C Corporation is required to record a Registered Agent with each state in which they do business.
Get Help Filing Taxes and Ongoing Operations for Your S Corporation
We understand that navigating the complexities of S Corporation taxes and operations can be overwhelming. Let us lighten the load. We’ll help you determine a reasonable W2 salary and ensure you avoid overpaying unnecessary payroll taxes.
Reach out to us today for personalized assistance with your tax strategy—because your success is our priority. Let’s work together to make your financial journey as smooth as possible. Contact us now and let’s start saving you money!