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Start an S Corporation in North Carolina

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Carlos Serrano
Written byCarlos Serrano
Alexis Konovodoff
Edited byAlexis Konovodoff
Updated May 19, 2023

Any small business owner who wishes to form a business entity in North Carolina has some crucial choices to make. Amongst those choices is the type of business you create, as the IRS treats companies differently depending on their structure.

This article investigates what it means to create an S corporation in North Carolina and why that may be good for you.

S Corporation in North Carolina: Key Points

  • An S corporation is a tax classification offered by the IRS.

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

  • S corp status offers pass-through taxation, liability protection, lower self-employment tax, and easy management.

What Is an S Corporation?

The North Carolina Secretary of State defines an S corporation (S corp) as a business that’s owned by its shareholders.[1] That business entity has a board of directors, similar to a C corporation (C corp). It also has corporate bylaws and Articles of Incorporation.

Where it differs from a C corp is taxation. A business with S corp status doesn’t pay any corporation tax. Instead, the income it generates passes through to the company shareholders, who pay taxes based on their income tax rates.

As such, an S corp has similarities to a limited liability company (LLC). However, it also isn’t the same as an LLC. For example, the withdrawal of a shareholder doesn’t result in an S corp automatically shutting down. In an LLC, the business closes when a member leaves.

So, you can view an S corp structure as a middle ground between the C corp and LLC structures. However, you must remember that S corp status isn’t a business structure. It’s a tax classification.

That tax classification is why many business owners opt for S corp status.

Tax Considerations for an S Corporation in North Carolina

Due to the S corp structure being a tax classification, you naturally need to understand the ramifications of this structure on your business taxes. Let’s examine three crucial aspects of S corps tax treatment.

North Carolina Tax Treatment of S Corporations

North Carolina charges a corporate income tax rate of 2.50%, which comes into effect for any taxable income after January 1, 2019.[2] 

An S corp doesn’t pay this corporate income tax. Instead, the company's revenue, losses, deductions, and distributions get passed to the S corp’s shareholders.

When choosing your tax structure, the crucial question is which results in paying less tax. With such a low rate of 2.5% on corporate earnings, it may be better to form a C corp and keep more money inside the business.

Conversely, setting up an S corp is a better idea if you intend to take the majority of your company’s revenue out of the business. You’ll avoid double taxation on those earnings with S corp status.

North Carolina Franchise Tax for S Corporations

North Carolina charges a franchise tax rate of $1.50 for every $1,000 a corporation generates. In other words, it’s a rate of 0.15%. Any company that must pay franchise tax must pay a minimum annual tax of $200.

However, these rates change for an S corp. If you have an S corp, you pay a franchise tax of $200 per year on your first $1 million of earnings. After that, the rate reverts to the standard $1.50 per $1,000.[3]

As a result, setting up an S corp offers tax advantages if your company is likely to earn over $140,000 per year. Once you’re past that rate, you’ve paid $200 in franchise tax based on the standard rate. Everything from there to $1 million is essentially tax-free.

Pass-Through Taxation

North Carolina treats all S corps as pass-through tax entities. A pass-through entity is any business in which the money generated passes directly to the members or shareholders.

In other words, the business doesn’t pay corporate tax on those earnings.

Instead, tax is paid by each shareholder via their annual tax return. In North Carolina, an S corp shareholder may also have to pay self-employment tax, which currently stands at 15.3% of income.[4]

Requirements for Forming an S Corporation in North Carolina

By now, you may think that S corp status is an attractive proposition. You pay less franchise tax and no corporate income tax. However, only some types of business can be an S corp.

You apply for the S corporation taxation status through the Internal Revenue Service (IRS). According to the IRS, any application for the status must meet the following criteria:[5]

  • Be a domestic corporation based in the United States

  • Have no more than 100 S corp shareholders

  • Only offer a single class of stock to those shareholders

  • Ensure that shareholders are individuals, estates, or select types of trusts

  • Not be an ineligible business, such as a domestic international sales corporation (DISC) or certain types of insurance companies and financial institutions

Other corporations or partnerships can’t serve as S corporation shareholders. Similarly, nonresident aliens also can’t be shareholders.

With such strict restrictions, it’s clear that forming an S corp is more complex than creating a limited liability company. If you need help, Swyft Filings can walk you through the criteria, ensure you’re eligible, and handle the filing on your behalf.

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Filing as an S Corp in North Carolina

Now that you understand the basics of creating an S corporation in North Carolina, let’s investigate the specifics. Follow this six-step process to achieve S corp status.

Step 1: Choose a Business Name

Your business name is your first form of connection with your customers. It’s what people remember first about your company, meaning you need to come up with a catchy and relevant name.

You need a name that another business in North Carolina isn't already using. Specifically, your name must be distinguishable from any other on the North Carolina Secretary of State’s records. That name also can’t contain offensive terminology or imply that your company is a government entity.[6]

Once you have a name, you need to check it isn’t already in use. Our free business name search lets you know within one hour if your name is available. 

Assuming the name isn’t already taken, you can reserve it. Name reservation isn’t mandatory in North Carolina. But if you go down this route, you can reserve your chosen name for 120 days. You can’t renew a reservation once it expires in North Carolina.

You’ll solidify your business name in the next step. Once you do, it’s important to trademark the name so no other company can masquerade as your S corporation in North Carolina.

Finally, you can operate under a Doing Business As (DBA) name in North Carolina. The state calls these Assumed Business Names (ABNs).[7] As with your regular corporate name, you must follow the rules for registration when creating an ABN.

Step 2: Appoint Directors and a Registered Agent

As mentioned earlier, all North Carolina S corps must have a board of directors. Your S corp directors are typically also S corporation shareholders as they’ll earn an income from the business.

Your board of directors is responsible for running the corporation. It creates directives, develops your business mission, and dictates the business's direction.

Once you have your board, you must focus on getting a registered agent. A North Carolina registered agent is an individual or business entity that accepts the following responsibilities:

  • Accept and pass on legal notices and documents, such as service of process, on your company’s behalf

  • Maintain a physical street address for use as a registered business address

  • Keep regular business hours to ensure they’re always available to accept mail

You can serve as your own registered agent in North Carolina. However, doing so comes with disadvantages:

  • Must register your address with the Secretary of State, meaning anybody can access that address

  • May receive sensitive legal documents during inopportune times

  • Must dedicate time to the admin required for the registered agent role

  • May misidentify or lose crucial documents

Many S corps use a third-party registered agent service, such as Swyft Filings. Our team offers 24/7 access to your documents via our online dashboard. We’ll also inform you of the due dates for any crucial documents and provide the expertise you need to handle any service of process documents you receive.

Step 3: File Articles of Organization

Whether you’re forming an LLC or a corporation, you must complete documents informing the state of North Carolina. These documents differ depending on your business entity type, though the information you provide is similar.

Those who wish to form an LLC need to submit Articles of Organization, while corporations must file Articles of Incorporation.

Both forms require you to fill out basic details about your business and what it does. You also need to name your registered agent. For corporations, you must provide details about your boardroom structure.

The filing fee for these forms is $125, and you can submit them either online or via mail to the following address:

Business Registration Division

PO Box 29622,

Raleigh, NC 27626-0622

Once you’ve received your Certificate of Formation and officially have a company, you must stay in good standing with the state by submitting an Annual Report to the Secretary of State each tax year. This report confirms your company is still operational and informs the state of any changes it needs to know about. 

Submit this form online or via mail to the following address:

Business Registration Division

PO Box 29525,

Raleigh, NC 27626-0525

Step 4: Create an S Corp Operating Agreement

North Carolina recommends that your business creates an operating agreement, though it’s not a legal requirement.

An operating agreement is a legal document your S corp uses to outline all its bylaws. It also highlights each business owner's investment and ownership stakes.

Without an operating agreement to work from, the state implements its default rules if it needs to handle an issue related to your business.

The following should be in your operating agreement:

  • Information about the financial interests and ownership stakes of each member of the business

  • Bylaws for corporate governance

  • Process for when a member departs or goes bankrupt

  • Outline of any tax issues related to the business

  • Process you’ll follow upon dissolution of the S corp

Step 5: Apply for an Employer Identification Number

In most cases, your S corp will need an Employer Identification Number (EIN). The IRS uses this ID number to identify your business for employment taxes. You’re required to have an EIN if you have any employees.

Your North Carolina S corporation isn’t legally required to get an EIN if it has no employees. However, it’s still a good idea to get an EIN, even as a non-employer, for the following reasons:

  • Allows you to open a business banking account

  • Lends credibility to your S corp

  • Prepares your business if you reach the point where you need to hire employees

We’ll obtain an EIN on your behalf so you don’t have to handle the paperwork, or you can apply for an EIN online via the IRS website.

Step 6: File Form 2553 for S Corporation Election

Finally, you’re ready to file for S corporation status. To do that, you must complete Form 2553 and submit it to the IRS. This form requires you to name the shareholders in your proposed S corp. You also have to demonstrate that you meet the qualification criteria mentioned earlier.[8]

Ideally, you will submit Form 2553 during the tax year before the one in which you wish to be treated as an S corp. Alternatively, you can file within two months and 15 days of the beginning of the current tax year.

If your LLC is past the deadline for S corp submission, you can file Form 8832, Entity Classification Election. This form allows you to apply to have your business taxed as a corporate business entity.[9] File it alongside Form 2553 to attain S corp status after the normal filing deadline.

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North Carolina S Corp vs. North Carolina LLC

S corp status offers benefits over C corp status for tax purposes. But is it better than forming a limited liability company? Let’s look at the pros and cons of each.

Advantages of Starting an LLC in North Carolina

  • Set up as a pass-through tax entity, meaning you pay no corporation tax

  • Offers more control over your leadership structure than with an S corp

  • Easy to start and maintain

Disadvantages of Starting an LLC in North Carolina

  • Limited liability protection means a judge can still order the seizure of your personal assets

  • Dissolution can occur if a member leaves

Advantages of Forming an S Corporation in North Carolina

  • Offer stronger liability protection than LLCs

  • Circumvent the double taxation problem seen with C corps and not having to pay payroll taxes on distributions to shareholders

  • Count shareholder income as passive income if they don’t actively participate in running the business

  • Avoid dissolution if one of its shareholders leaves

Disadvantages of Forming an S Corporation in North Carolina

  • Have to adhere to corporate governance and formation rules

  • Must meet stringent criteria to complete the election process

Ready to File for S Corp Status in North Carolina?

No matter what type of business entity you wish to create, filing can be a chore. You must file the correct forms and ensure the information you submit is accurate.

That’s where Swyft Filings comes in. We can handle the complications of filing on your behalf. Whether that means helping business owners create an LLC or helping a small business become an S corporation in North Carolina, we’re here to help.

We’ve worked with over 300,000 companies, many of which wanted to file for S corp status. With our help, you can get to grips with S corp limitations and start your business in as little as 10 minutes. Use our S corp formation service today, and we’ll handle the hard work for you.

Frequently Asked Questions

What is an S corporation in North Carolina?

An S corporation is a pass-through tax structure that allows you to avoid double taxation on your company’s earnings.

Does North Carolina recognize S corporations?

Yes, the state of North Carolina recognizes S corporations.

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

The IRS can take up to 60 days to process an S corp application, though it’s usually much faster.

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

The main differences lie in how you deal with business income and structure the business.

What are the requirements for an S corporation in North Carolina?

According to the IRS, any application for S corp status must meet the following criteria:

  • Be a domestic corporation based in the United States

  • Have no more than 100 S corp shareholders

  • Only offer a single class of stock to those shareholders

  • Ensure that shareholders are individuals, estates, or select types of trusts

  • Not be an ineligible business, such as a domestic international sales corporation (DISC) or certain types of insurance companies and financial institutions

Are taxes for LLCs and S corps the same?

There are often variances in self-employment taxes between an LLC and S corp.

What is the S corp tax rate?

S corps don’t pay corporate taxes. As such, your tax rate depends on the rate you pay via your personal income tax return.

How do I dissolve an S corporation in North Carolina?

You must submit an Articles of Dissolution form to the North Carolina Secretary of State.[10]


Bibliography

  1. North Carolina Secretary of State. “Business Corporation.” Accessed March 12, 2023.

  2. North Carolina Department of Revenue. “Tax Rate and Basis for the Tax.” Accessed March 12, 2023.

  3. North Carolina Department of Revenue. “Franchise Tax Rate.” Accessed March 12, 2023.

  4. Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes).” Accessed March 12, 2023.

  5. Internal Revenue Service. “S Corporations.” Accessed March 12, 2023.

  6. North Carolina Secretary of State. “Selecting a Name.” Accessed March 12, 2023.

  7. North Carolina Secretary of State. “Assumed Business Names.” Accessed March 12, 2023.

  8. Internal Revenue Service. “About Form 2553, Election by a Small Business corporation.” Accessed March 13, 2023.

  9. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 13, 2023.

  10. North Carolina Secretary of State. “Closing NC Business.” Accessed March 13, 2023

Originally published on May 19, 2023, and last edited on May 19, 2023.

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