Start an S Corporation in Hawaii

If you want to start an S corporation in Hawaii, you’ve come to the right place. This guide walks Hawaii small business owners through the paperwork they need to form an S corp with the IRS and Hawaii state offices. We’ll also help you evaluate whether S corp status is right for your business entity.

S Corporation in Hawaii: Key Points

• An S corporation is a corporation or LLC that elects the Federal tax classification with the IRS.

• S corp status does not affect the business structure, whether a corporation or LLC.

• Eligible corporations and LLCs can elect S corp status by filing IRS Form 2553.

What Is an S Corporation?

S corporations are business entities that have S corporation status with the IRS. S corp status is a Federal tax classification, so it does not affect the business structure. 

Even though the terms “C corporation” and “S corporation” sound mutually exclusive, a C corporation is a business structure while an S corporation is a tax status.

S corp status is a special designation issued by the IRS. Once your business has S corp status, your business is referred to as an S corporation by the IRS and the Hawaii Department of Taxation, among other relevant offices.

A Hawaii corporation or limited liability company (LLC) can become an S corporation. Sole proprietorships cannot be S corps. They must first become a C corp or LLC.

Business entities must meet specific qualifications laid out by the IRS to receive S corp status. To become an S corporation, they must file Form 2553, an S corporation election, to the IRS. 

Tax Considerations for an S Corporation in Hawaii

How will your Hawaii S corporation be taxed? State taxes won’t change substantially from the status quo, but Federal income tax is very different for C corporations vs. S corporations. 

Hawaii Tax Treatment of S Corporations

S corporations in Hawaii must file Form N-35, the Hawaii S corp income tax return, which calculates state corporate income tax.[1] However, this income tax is usually “passed through” to the S corporation’s shareholders. 

Normal state taxes required for doing business in Hawaii apply to S corporations like any other business.

Hawaii Franchise Tax for S Corporations

The Hawaii Department of Taxation charges a General Excise Tax, or GET, similar to a franchise tax, on the gross income of every Hawaii business.[2] Hawaii S corporations owe this GET tax, so they must register for a GET license and file a yearly tax return.

Certain Hawaii cities and counties, such as Honolulu and Hawaii, charge additional GET taxes. These taxes are in place of sales tax.

Pass-Through Taxation

Like limited liability companies, S corporations receive “pass-through” tax treatment regarding income tax. In Hawaii, this applies at the state and Federal level. Income from S corp activities passes to shareholders’ individual income tax returns. Instead of corporate income tax, they pay self-employment tax on their earnings.

Hawaii S Corporation Distributions

S corporations have a crucial tax difference from Hawaii LLCs. While members of an LLC owe self-employment tax on the entirety of their income from their small business, S corp shareholders can take further distributions that aren’t classified as employment income. 

S corp shareholders can only take these distributions after receiving “reasonable” compensation for their work for the company.

Requirements for Forming an S Corporation in Hawaii

Does your business qualify to be an S corporation? The IRS only grants S corp status to business entities that meet the following requirements:[3]

• Be located in the United States

• Have only 100 or fewer shareholders

• Own only one class of stock

Note that “certain financial institutions, insurance companies, and domestic international sales corporations” are ineligible for S corp status. Furthermore, partnerships, corporations, and non-resident foreign nationals cannot be S corporation shareholders.

Not sure if you meet these requirements? If you let Swyft Filings take care of your S corp election, we’ll make sure you qualify before sending in the form. 

Filing as an S Corp in Hawaii

Here is a step-by-step guide to forming an S corporation in Hawaii. Complete all these steps, and within 60 days, the IRS should grant you S corp status. 

This guide will tell you how to form a Hawaii corporation and file your S corp election. Note that a Hawaii LLC is also eligible for S corp status.

Step 1: Choose a Business Name

First, you need a business name that’s distinguishable from other registered and trademarked names in Hawaii. Hawaii state law instructs the Department of Commerce and Consumer Affairs (DCCA) to reject a business name if it is “substantially identical” to an existing name.[4]

The laws are detailed and stringent, so you’ll want to make sure your name is spelled and pronounced differently from the other names you can find and has a coherent meaning that separates it from other business names. If the state rejects your name, they’ll tell you why.

Here’s some other requirements for your business name:

• Can’t mislead the public by implying that your business does anything other than what it actually does

• Must avoid certain restricted words under state law, including “bank,” “savings and loan,” and other terms.

• Must contain an indicator of the type of business (Corporation, Incorporated, Limited, Corp., Inc., or Ltd.)

When you think you’ve chosen the perfect business name, run it through this checklist to be sure:

1. Put your name into a business name search to make sure it isn’t taken

2. Make sure an adequate web domain and social media handles are available to build your online brand

3. Check for available trademarks

4. File a name reservation on Hawaii Business Express (HBE) for $10 to keep your name reserved for 120 days[5]

Step 2: Appoint Directors and a Registered Agent

Your S corp must have a complete corporate structure assembled to file articles of organization and operate in good standing. To do that, your S corporation shareholders must appoint a board of S corp directors. For starters, you can be the sole shareholder and sole director.

Ideally, the board of directors is a diverse and experienced team of business professionals who collectively oversee the corporation’s well-being. In larger corporations, they rarely run the corporation themselves and, instead, hire officers to carry out the business's daily operations.

S corporation shareholders elect these directors, who serve terms of a length indicated in your corporation’s bylaws. The board of directors is required to meet at least once a year. 

LLCs are not run by shareholder-appointed directors, but by its members (owners), who may then hire managers.

Choosing Your Hawaii Registered Agent

To start an official Hawaii business, you must find a registered agent in the Aloha State who agrees to be the registered agent for your company. Your registered agent receives official legal correspondence on your behalf. This is a critical role for your business. 

Your Hawaii registered agent must have a physical street address in Hawaii, not a P.O. box, and maintain consistent business hours. It’s wise to find an experienced registered agent, preferably a professional service. Missed or lost legal documents during a legal proceeding could harm your business. 

While you let Swyft Filings form your S corporation, we can also serve as your Hawaii registered agent. We’ve helped thousands of business owners like yourself to ensure no legal notice goes unnoticed.

Step 3: File Articles of Incorporation

Articles of incorporation are the founding documents of your S corporation. In Hawaii, this is a simple form with a $50 filing fee. LLCs file a comparable form called articles of organization.

Here’s the information you’ll need to file your articles of incorporation with the state of Hawaii:

• Business name and mailing address

• Name and street address of Hawaii registered agent

• Number of “common shares all of the same class” that will be issued as a corporation[6]

• Name and address of each incorporator 

It’s easiest to file your articles of incorporation online at the Hawaii Business Express website. HBE will also set you up with a General Excise number for a $20 filing fee from the Department of Taxation. You will need this number to do business in Hawaii.

Once you’re an official business, you can purchase a certificate of good standing (also called a certificate of formation) from the Hawaii Department of Commerce and Consumer Affairs (DCCA). You’ll owe an annual report within four months of the start of each taxable year you’re in business. The filing fee is $15, and the late fee is $100 per late month.[7]

Step 4: Create S Corp Bylaws

Before too many decisions are made for the business and its future, business owners should convene, perhaps with the assistance of an attorney, and sign bylaws that lay out how shares will be organized and distributed, decisions made, and the structure of the company’s board of directors, among other essential details.

These rules are set down in the bylaws of an S corporation and agreed to by its shareholders. Bylaws are the chief governing document of the business. They decide major protocols and stipulations of how the corporation will be run. We can help you draw up robust bylaws for your S corporation that set you up for success.

LLCs are typically governed by a similar document called an operating agreement.

Step 5: Apply for an Employer Identification Number

If there is an essential number a business cannot do without it, that is its Employer Identification Number. This number is also called a Tax ID, Federal Tax ID, FEIN, and, most commonly, EIN.

The IRS will issue your business an EIN. You’ll need one right away to sign up for relevant state licenses and permits, bank accounts, credit cards, and to withhold employment taxes, among many other critical business activities. At the end of the year, you’ll use your employer identification number to pay income and employment taxes.

Step 6: File Form 2553 for S Corporation Election

When your business entity is formed, and you’re sure it meets the qualifications for S corp status, it’s time to make your S corporation election. To do this, you’ll file Form 2553 to the IRS. All the shareholders or LLC members who own part of the business during the time of the election would have to sign it.[8]

The deadline to file Form 2553 for the current tax year is two months and 15 days after the start of that tax year. LLCs that are filing past that deadline will need to file Form 8832 at the same time that they file Form 2553.

Hawaii S Corp vs. Hawaii LLC

Your choice of tax classification can have profound effects on your business model. Here we’ll discuss the pros and cons of a Hawaii LLC that opts for a traditional tax treatment versus one that makes an S corporation election.

Advantages of Starting an LLC in Hawaii

LLCs have a straightforward tax treatment and a simple organizational structure. It can be the easiest way to do business from a regulatory and administrative perspective. Meanwhile, members still enjoy liability protection, similar to a traditional corporation.

Disadvantages of Starting an LLC in Hawaii

Hawaii LLCs are simple, but taxpayers who draw lots of income from their LLC might benefit from a more complex tax treatment. All the money you make as an LLC member is subject to self-employment tax, even if you’re making more money than you would if you were paid a salary for your work.

Advantages of forming an S Corporation in Hawaii

Business owners make S corporation elections for tax purposes. And if you already have pass-through tax treatment, as any Hawaii LLC does, then S corp status would help reduce your self-employment tax liability. 

S corporation shareholders can pay themselves a “reasonable” salary for their contributions to the corporation and take distributions beyond that free of self-employment tax. This is a significant tax advantage over LLCs for members of highly profitable companies who want to draw distributions out of the company’s earnings immediately.

Disadvantages of forming an S Corporation in Hawaii

Compared with a standard Hawaii LLC, S corp status adds a lot of paperwork and increases the scrutiny you’ll have to bear from the IRS. S corporations are required to maintain payroll, so if you’re not already doing that as part of your business, it can create a lot of extra work. 

Meanwhile, suppose the business is in its early stages investing in growth, losing money, or breaking even. In that case, you likely won’t be distributing high excess profits, which means your primary tax advantage of S corp status would be moot.

Ready to File for S Corp Status in Hawaii?

Building an S corporation in Hawaii is a serious undertaking. Now that you know the forms and filing fees involved, you understand that a small mistake or misreading of complex rules and S corp limitations and deadlines can set your plans back by months and cost hundreds of dollars in extra fees.

But you don’t have to risk all that time and money. Swyft Filings’ S corp formation service can handle the paperwork for you. Whatever stage it’s in, your small business will become an S corporation as fast as bureaucracy permits, with no hiccups or mistakes. For over a decade, we’ve made our business helping business owners just like you.

Frequently Asked Questions

What is an S Corporation in Hawaii?

An S corporation is an LLC or C corporation that elects to be taxed as an S corporation by filing Form 2553 to the IRS.

Does Hawaii recognize S corporations?

Yes. Hawaii taxes S corporations in accordance with their Federal designation.

What is the turnaround time for filing for S corp status with the IRS?

The IRS says it will process your S corporation election within 60 days after you file Form 2553.

What is the difference between an S corp and an LLC?

LLCs and S corporations are taxed as pass-through entities, but an S corp is a corporation or LLC that has filed an S corp election with the IRS. S corporations have a slightly different tax treatment that permits them to allocate distributions free of self-employment tax after paying “reasonable” compensation for the work involved. 

What are the requirements for an S corporation in Hawaii?

Hawaii S corporations are limited in the number of shareholders they can have, they can only issue one class of stock, and certain entities and individuals are disqualified from being shareholders, among other limitations. 

Are taxes for LLCs and S corps the same?

LLCs can be taxed as a pass-through entity, a C corporation, or an S corporation. An S corp is a pass-through entity that must compensate anyone who works for it as an employee and has the potential to allocate distributions in addition to this compensation free of self-employment tax.

What is the S corp tax rate?

S corps are subject to Hawaii’s franchise tax. Income taxes are dependent on the tax situation of the S corp shareholders, who pay income taxes for the S corporation on their personal tax returns.

How do I dissolve an S corporation in Hawaii?

To dissolve an S corporation in Hawaii, follow the dissolution procedures in the company’s bylaws and file articles of dissolution to the Hawaii Department of Commerce and Consumer Affairs with a filing fee of $25.

Bibliography

1. Hawaii Department of Taxation. “Instructions for Form N-35.” Accessed February 22, 2023.

2. Hawaii Department of Taxation. “Tax Facts 31-1.” Accessed February 22, 2023.

3. Internal Revenue Service. “S Corporations.” Accessed February 22, 2023.

4. Hawaii Department of Commerce and Consumer Affairs. “Hawaii Administrative Rules Title 16 Chapter 36.” Accessed February 22, 2023.

5. Hawaii Department of Commerce and Consumer Affairs. “Form Fee Schedule Rev. 12/2022.” Accessed February 22, 2023.

6. Hawaii Department of Commerce and Consumer Affairs. “Articles of Incorporation.” Accessed February 22, 2023.

7. Hawaii Department of Commerce and Consumer Affairs. “Information for Domestic Profit Corporations.” Accessed February 22, 2023.

8. Internal Revenue Service. “Instructions for Form 2553 (Rev. 12/2022).” Accessed February 22, 2023.