The S Corporation structure is very similar to the C Corporation, with a few notable differences. The most important of these differences is that S Corporations are eligible for special pass through taxation status with the IRS. This allows S Corporation owners to avoid double taxation on their business income.
Frequently Asked Questions
S Corporation FAQs
What is the primary advantage of an S Corporation?
What formal paperwork must be filed when incorporating as an S Corp?
Articles of Incorporation must be filed in order form your S Corp. This document contains basic information about the company, its owners, and its directors. Depending on the state of incorporation, there may also be state-level fees or taxes that must be paid.
A filing service such as Swyft Filings can take care of the required filings for an S Corporation. This allows you to focus on developing and growing your new company.
Are there any restrictions on who can file to form an S Corp?
Outside of some state-specific regulations that require individuals to be 18 to own a business, there are no restrictions on who can form a corporation. However, if a corporation decides to elect for S Corporation status, there are several restrictions placed on who can become part of the organization's ownership. They are as follows:
- All S Corporation shareholders must be legal citizens of the United States.
- S Corps are only able to distribute one uniform class of stock.
- S Corps are limited to 100 different shareholders
Is an attorney required during the S Corp filing process?
An attorney is typically not required when starting a business. A business filing service such as Swyft Filings can help you streamline the formation process, and save you a great deal of time, effort, and money. However, if you are unsure of which business structure may be right for you, or you have questions regarding specific tax or organizational issues, it may be advisable to speak with an attorney or accountant before starting a new business.
How should I name my S Corp?
Your company name must be unique and not deceptively similar to any other trademarked name or business. It is also required that your name not intentionally misrepresent the products or services you offer. For S Corps, most states require a signifier of your corporate status, such as “Company”, “Corporation”, “Incorporated”, or a relevant abbreviation to be added to your business name. Choosing a name for your S Corp is an important decision, so take time to research and select a name that will accurately represent you and your business.
What are the benefits of pass-through taxation?
One of the most common reasons that business owners elect to form an S Corp is that the structure is eligible for pass-through taxation. Under this special tax status, the corporation is never taxed on its income. Instead, each individual owner is taxed on the company’s profits and losses, as they are distributed and reflected on their personal income tax returns. This more often than not results in favorable tax implications for each of the company’s owners.
How is stock handled by an S Corp?
S Corps must explicitly list the number of shares that they will be distributing initially, along with their par value, in their Articles of Organization. Once the number of shares has been recognized by the state, the company is free to distribute each share as they wish, as long as it is in accordance with the ownership restrictions placed on S Corps. The number of shares (and their par value) may be altered in the future by filing a document called a Share Amendment with the state.
How is stock “par value” determined by an S Corp?
The par value is mainly a formality and is typically $.01, $1, or no value. This figure is determined by the company and may have some minor tax implications. The par value is not the value of the stock issued by the company. For more information or specific questions regarding par value, it is advisable to speak with an accountant.
Are there a required number of individuals needed to form an S Corp?
Most states only require one director in order to start an S Corporation. However, some states impose a minimum number of directors based on the number of shareholders the company has. This required number is typically never lower than three and there is no maximum limit.
How are S Corps organized from a structural standpoint?
There are three different formal leadership positions that make up an S Corporation, with each having their own role or responsibilities. An individual is able to, and will often, serve in more than one of these positions. They are as follows:
- Shareholder – Shareholders are the owners of the corporation and are able to vote in the election of directors and on other major corporate issues. They are not responsible for the day-to-day operations of the company.
- Director – Directors are elected by the shareholders and make major business decisions in a manner that will be in the best interest of the company’s investors. They also supervise the company’s officers.
- Officer – Officers are responsible for managing the day-to-day operations of the company.
Where should I form my S Corp?
Some of the most popular states in which companies typically choose to incorporate are Nevada, Delaware, and Wyoming. Many new S Corp owners do not realize that it is possible to incorporate in a state other than the one in which they live or operate. However, through a process called “foreign qualification”, it is possible and often advisable.
If your company operates only in a small area, it may be advisable to file within your state. The main reason for this is that many states require corporations that foreign qualify to pay additional taxes and fees which can be a financial burden for smaller companies. There are also some logistical issues that are related to foreign qualification that may cause additional expenses.
If your company is large, has many shareholders, or operates on a large geographical scale, foreign qualification may be the best option. Each state has different tax and filing requirements so it may be advantageous for your company to foreign qualify.
Do S Corps face any publication requirements?
There are certain states that will require you to publish a notice of business formation in the local newspaper(s) such as Arizona, New York, Nebraska, and Pennsylvania. This requirement can be met by using a filing service such as Swyft Filings.
Do all S Corps need a Registered Agent?
All formal business entities, including S Corps, are required to have a Registered Agent on file with the state at all times. The agent may be an individual or company with a physical address located in the state of incorporation. Agents must be available at all times during standard business hours (9 a.m. - 5 p.m. Monday – Friday). The role of a Registered Agent is to receive any and all of communications from the government to the business. The agent’s name and address must be disclosed as part of the company’s public record.
If you are foreign qualifying your business or wish to keep your contact information private, it may be wise to hire a professional Registered Agent service such as Swyft Filings. Our professional Registered Agent service ensures that your legal requirements will be fulfilled and that all communications will be relayed to your company in a timely manner.
Where can I find a reliable Registered Agent?
Swyft Filings offers a professional Registered Agent service as well business filing services. Regardless of the state in which your business is located, we can provide you with Registered Agent services. Swyft Filings provides companies of all types and sizes an affordable solution that will ensure that they remain compliant with all Registered Agent requirements.
What are the general steps for incorporating as an S Corp?
The first step to incorporating as an S Corp is to file your company’s Articles of Incorporation with the state in which you are establishing your business. Once this has been completed, there will be a set of formal compliance processes that your business must conduct. These processes are as follows:
- Hold a documented organizational meeting with your initial board of directors. During this meeting you will need to adopt a written set of by-laws, approve resolutions establishing the company’s initial financial accounts and appoint officers.
- Distribute all initial stock and document the distributions in an official ledger. This ledger must be continuously updated to reflect all stock transfers.
There may be some state specific requirements that you must observe during these processes as well. Also, keep in mind that S Corps have many ongoing compliance requirements that will need to be fulfilled on an annual basis.