Start an S Corporation in Montana

Would your small business benefit from S corp status with the IRS? This article will help entrepreneurs weigh the pros and cons for their business entity and detail the steps required to start an S corporation in Montana.

S Corporation in Montana: Key Points

• An S corporation is not a business structure but an IRS tax classification.

• With S corp status, businesses benefit from pass-through taxation and lower self-employment tax, among other advantages.

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

What Is an S Corporation?

Although the term “S corporation” is often discussed as a business structure, it’s a tax classification the IRS grants. Any business corporation, including a C corporation or limited liability company (LLC), might be eligible for S corp status. But business entities have to meet specific requirements to qualify.

An S corporation is a qualifying business entity with S corp status with the IRS. To receive S corp status, a corporation has to file Form 2553 to the IRS. This is called an S corporation election.

C corporations and LLCs can be S corporations. And when you become an S corporation, you maintain your business structure. Sole proprietorships must incorporate as business corporations to receive S corp status.

Tax Considerations for an S Corporation in Montana

So how might your Montana business benefit from S corp status? Let’s look at the tax treatment you can expect.

Montana Tax Treatment of S Corporations

In Montana, S corporations are taxed as pass-through entities, meaning that the corporation does not pay state corporate income tax. Instead, those tax obligations pass through the entity to its shareholders’ personal tax returns, avoiding what’s known as double taxation.[1] 

Montana Franchise Tax for S Corporations

Montana does not have a franchise tax. But depending on your business type, you’ll likely owe additional state tax aside from income tax. Check the Montana Department of Revenue website to learn about the tax treatment in Montana for your specific business.

Pass-Through Taxation

At the Federal level, your S corporation will also be exempt from corporate income taxes. Instead, shareholders will pay the income tax for the S corporation on their personal tax returns. 

When they’d previously be double taxed, where they pay corporate taxes and then personal income taxes, pass-through taxation can significantly reduce their overall tax obligation. These potential tax savings are why C corporations should consider filing an S corporation election.

Potential to Reduce Self-Employment Tax

Unlike members of straightforward LLCs, S corporation shareholders can pay themselves two ways: through compensation for their work on the business as an employee and “distributions” of additional profits. These distributions are not subject to self-employment taxes.

Keep in mind that S corp shareholders must receive a reasonable salary for the work they do for the company before taking distributions. And if you allocate significant distributions, you’ll invite IRS scrutiny. But if your business is very profitable, this tax treatment could lower your individual income taxes.

Requirements for Forming an S Corporation in Montana

S corp status is not available to every business. For an S corporation election to be accepted by the IRS, your business must meet the following requirements:[2]

• Be domestic and eligible to be taxed as a corporation

• Have a maximum of 100 shareholders sharing the same class of stock

• Not have partnerships, corporations, and nonresident non-U.S. citizens as shareholders

Some financial corporations are ineligible for S corp status. You don't have to worry about this if you’re not an insurance company, international sales corporation, or financial institution.

The IRS will reject your S corporation election if you don’t meet these requirements.

Filing as an S Corp in Montana

Here are the steps to forming an S corporation in Montana. If your Montana LLC or C corporation is already up and running, skip to Step 6 for advice on filing for S corp status.

Step 1: Choose a Business Name

Your business name is critical to the process of forming your company. First, conduct a business name search with the Montana Secretary of State or use our free business name search tool. Your new business name must be distinguishable from existing non-dissolved businesses on the record. Refer to this page for guidelines on what makes one business name distinguishable from another.

There are only two other state rules for choosing your company name:[3]

1. Must contain the word “corporation” (or its abbreviation “corp.”), “incorporated” (“inc.”), “company” (“co.”), or “limited” (“ltd.”)

2. Cannot imply that you are conducting business for any purpose other than what’s stated in your articles of incorporation and within the law

If your name meets these requirements and is available, look to ensure that a web domain and social media handles are available for your business. Also, think about reserving state or Federal trademarks for your company.

Need to buy some extra time? File a name reservation with the Montana Secretary of State. For a $10 filing fee, your business name will be yours for 120 days.[4]

Step 2: Appoint Directors and a Registered Agent

If you’re forming a C corporation intending to file for S corp status, you’ll need to form a board of directors before your company’s incorporation. LLCs planning to file for S corp status don’t have to do this.

S corporation shareholders appoint their company’s directors by a vote. Your bylaws should detail how your board of S corp directors will be selected and maintained. But for now, you need initial directors. You can be the sole director and shareholder if you're a solo entrepreneur.

S corp directors are responsible for overseeing the company’s long-term profitability. By law, they must meet annually.

Finding a Montana Registered Agent

The registered agent for your Montana S corporation is the office that receives legal correspondence on your behalf. Your registered agent must maintain regular office hours and a street office address in Montana.

You can be your own registered agent, but if you were getting served with a lawsuit, would you want someone walking into your place of business and interrupting a meeting to hand you papers? Most business owners wouldn’t. 

We recommend Swyft Filing’s trusted, secure, and professional registered agent service for your Montana S corporation. We’ll keep your documents secure and in one place and keep you informed on everything you need to know as soon as you need to know it.

Step 3: File Articles of Incorporation

This is the step that makes your Montana business official. You can complete your articles of incorporation online with the Montana Secretary of State. The filing fee is just $35.

This document is called the articles of organization or certificate of formation for LLCs.

Here’s the information you’ll need to fill out your Montana articles of organization:[5]

• Business name

• Number of shares you’re going to issue

• Names and addresses of your office and registered agent

• Names and addresses of each incorporator

You can put additional information in the articles of incorporation, including details on its purpose and structure, but the above is all that’s required.

Now that your business is official, you won’t owe franchise tax to the state of Montana, but you’ll need to file an annual report keeping this information up to date. The state fee for your annual report is $20 before the deadline of April 15 and $35 after that.[6]

Step 4: Create S Corp Bylaws

Your bylaws detail the inner workings of your Montana corporation, answering critical questions such as: 

• How will directors be hired? 

• Who are the business owners, and through what procedure would ownership change hands in the future? 

• How will officers and other employees be hired and fired? 

• When will the S corp directors meet?

LLCs have a similar document called an operating agreement. You’ll want to draw up bylaws and get them signed by all business owners involved so everyone is on the same page. Without bylaws, your business is vulnerable to litigation in the event of a disagreement, and potential investors and partners may question its legitimacy.

Step 5: Apply for an Employer Identification Number

Your Employer Identification Number (EIN) is a social security number for your Montana business. Also called a Federal Tax ID, the IRS issues an EIN to every business, which they use to file taxes.

You’ll need an EIN right away to start withholding employment taxes for your workers and to pay quarterly estimated income tax. It’s also required for basic business operations, such as opening a business bank account or securing a loan or credit card.

Most importantly, you need an EIN to file an S corporation election and receive S corp status.

Step 6: File Form 2553 for S Corporation Election

Until your business entity can file Form 2553 successfully to the IRS, it is not an S corp. All S corp shareholders need to sign the form. You should hear if the IRS accepts the form within 60 days of filling it out, and your company will have S corp status.

Take note of these S corporation filing deadlines:[7]

• For S corp status in the current tax year: Within two months and 15 days of the beginning of that tax year.

• For S corp status in the coming tax year: Anytime in the previous tax year.

LLCs that miss the deadline must file Form 8832, another IRS form, at the same time that they file Form 2553.

Montana S Corp vs. Montana LLC

If you have a Montana LLC, you’re probably aware it already benefits from pass-through taxation. So why would you file an S corporation election for tax purposes? 

As we compare the two, you’ll see that some limited liability companies will still benefit from S corp status.

Advantages of Starting an LLC in Montana

LLCs have simple management and corporate structures. It’s the most straightforward business structure for small businesses to use, allowing them to benefit from pass-through taxation and personal asset protection. 

Disadvantages of Starting an LLC in Montana

While LLCs can be low maintenance among closely-held organizations, the structure can be somewhat brittle if the business changes hands often because members, rather than shareholders, control the business. 

In addition, even though LLC income doesn’t get double-taxed, all your income as an LLC member is subject to self-employment taxes.

Advantages of forming an S Corporation in Montana

By contrast, an S corporation shareholder can take distributions on top of fair compensation for their work on the business. So if you’re in a relatively hands-off position on a very profitable business, the S corp tax treatment could reduce your self-employment tax liability. 

Disadvantages of forming an S Corporation in Montana

S corp status comes with some extra paperwork. Anyone who does work for the business needs to do so as an employee, so you’ll need to run payroll if you don’t already. Since LLCs are already eligible as pass-through entities, if your shareholders won’t be taking distributions, an S corporation election is unlikely to be worth your while as a Montana LLC.

Ready to File for S Corp Status in Montana?

If you and your fellow business owners agree that S corp status is the way to go, remember that you don’t have to do the paperwork yourself. Our S corp formation service can take the work off your hands and make sure things get done perfectly.

We’ve helped thousands of small businesses file for S corp status, ensuring they meet their limitations before filing and avoiding costly delays from a rejected form. Let us handle the paperwork for your S corporation in Montana and save time for the important work: running your business.

Frequently Asked Questions

What is an S Corporation in Montana?

A Montana S corporation has elected S corp status with the IRS by filing form 2553, an S corporation election.

Does Montana recognize S corporations?

Yes, Montana taxes S corporations in line with their Federal designation as pass-through entities.

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

The IRS expects to turn around S corporation elections within 60 days.

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

A limited liability company (LLC) refers to a business with a specific structure. An S corp is a corporation (LLC or C Corp) with the S corp tax classification from the IRS. In short, S corp is a tax status, while LLC is a business structure. 

What are the requirements for an S corporation in Montana?

S corporations are limited in the number of shareholders and the people and entities that can be shareholders. Certain financial businesses are ineligible, and the business needs to be eligible for taxation as a corporation, among other limitations. 

Are taxes for LLCs and S corps the same?

LLCs and S corps both have pass-through taxation, but S corps can allocate distributions to their shareholders after they receive reasonable compensation for their services to the business.

What is the S corp tax rate?

S corps are taxed based on their shareholder’s personal income, so the tax rate will vary based on individual shareholders’ tax returns.

How do I dissolve an S corporation in Montana?

File articles of dissolution with the Montana Secretary of State, notify the IRS, and get up to date on taxes before closing business.

Bibliography

1. Montana Department of Revenue. “Pass-through Entities.” Accessed March 23, 2023.

2. Internal Revenue Service. “S Corporations.” Accessed March 23, 2023.

3. Montana Annotated Code 2021. “Corporate Name.” Accessed March 23, 2023.

4. Montana Annotated Code 2021. “Reserved Name.” Accessed March 23, 2023.

5. Montana Annotated Code 2021. “Articles of Incorporation.” Accessed March 23, 2023.

6. Montana Secretary of State. “Business Services Filing Fees.” Accessed March 23, 2023.

7. Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed March 23, 2023.