Start an S Corporation in South Carolina

Entrepreneurs preparing to start a small business in South Carolina must determine which business entity works best for them. That choice is vital because the entity you use has tax ramifications, with the IRS treating each option differently. 

This article explores the benefits of forming an S corporation in South Carolina and how to create this entity.

S Corporation in South Carolina: Key Points

• An S corporation is a tax classification that can apply to existing limited liability companies (LLCs) and C corporations.

• An S corp tax status offers pass-through taxation and liability protection.

• You must be a domestic corporation with no more than 100 shareholders, among other requirements, to elect S corp status.

What Is an S Corporation?

The Internal Revenue Service (IRS) defines an S corporation as a pass-through tax entity. This is an important distinction, as many assume S corp status is a type of business entity. It isn’t. It’s a tax classification that can apply to several types of businesses, including limited liability companies (LLCs) and C corporations (C corps).

With an S corp, a business can pass all income, deductions, credits, and losses through to its shareholders. These shareholders then pay taxes on what they receive via their personal tax returns. The business itself pays no corporate taxes, allowing business owners to avoid the issue of double taxation.

That’s a potentially huge boon for C corp owners who feel the pinch from being taxed twice on their business earnings.

This pass-through structure is familiar to LLC owners and members as it’s the same structure they benefit from with the LLC entity. However, an S Corp also offers greater liability protection and a more permanent business structure than you get with an LLC. As a result, obtaining S corp status is desirable for both C corp and LLC owners, assuming you can meet the tight criteria for creating an S corp.

Tax Considerations for an S Corporation in South Carolina

With S corp status being a tax classification, it helps to understand how the state of South Carolina treats this type of business. Let’s look at the tax treatment you can expect from the state if you have an S corp.

South Carolina Tax Treatment of S Corporations

South Carolina has a flat 5% corporate income tax rate, which applies to C Corps.[1] However, S Corps can either take advantage of the pass-through structure or be taxed at the entity level instead of the shareholder level.

As such, South Carolina is more flexible than other states regarding S corps. Shareholders can choose to declare via their income tax returns. Alternatively, the S corp can pay business taxes, with the shareholders then not having to declare their income at the state level.[2]

South Carolina Franchise Tax for S Corporations

South Carolina has something similar to a franchise tax for S corps in its annual License Fee. An S corporation must pay $15 plus 0.1% of its paid-in surplus and capital each year to continue operating in the state. The License Fee must be at least $25 per year.[2]

Your S Corp has to declare this License Fee and relevant calculations on Form SC1120S, which is South Carolina’s S Corporation Income Tax Return.[3]

Pass-Through Taxation

As mentioned, South Carolina treats S Corps as pass-through entities, meaning all business income passes to the organization’s shareholders. These shareholders then declare their income on their personal tax returns.

The chief benefit of pass-through taxation is that it ensures that business owners don’t have to worry about double taxation. Even in South Carolina, where an S corp can be taxed at the entity level, you either pay taxes via personal income or as business tax. You don’t pay both.

It’s also worth noting that you may have to pay other taxes related to the business, such as self-employment tax. Pass-through taxation for S corps only applies to business income.

Requirements for Forming an S Corporation in South Carolina

For the most part, the state of South Carolina is happy to grant S corp status to any company that follows the IRS’s rules for forming an S corporation.[4] These rules are as follows:

• Must be a domestic corporation based in the United States

• Must have no more than 100 S corporation shareholders who are either individuals, estates, or some types of trusts

• Must only offer a single class of stock to its shareholders

• Must be an eligible corporation (domestic international sales corporations, some financial institutions, and insurance companies can not hold S corp status)

South Carolina has an additional requirement for shareholders in the United States but not in South Carolina. If your S Corp has non-resident shareholders, the business must withhold 5% of the taxable income of these shareholders.[2]

If you need help obtaining S corp classification for your C corp or limited liability company, Swyft Filings makes it simple. Our S corp formation service can help you achieve S corp status in as little as 10 minutes.

Filing as an S Corp in South Carolina

With the basic requirements for forming an S corporation in South Carolina outlined, you may think the filing process is simple. That isn’t always the case, especially if you’ve yet to create your business. 

You must have a valid South Carolina company before applying for S corp status. The following six steps will take you from naming that business to applying to become an S corp.

Step 1: Choose a Business Name

The business name you choose must be unique from any other business name currently on the South Carolina Secretary of State’s register. As such, your first duty is to check your desired name against all company names operating in the state.

Thankfully, that’s an easier task than it sounds. Our free business name search can give you an instant answer to whether your chosen name is available. You can also use South Carolina’s Business Entities Online service to check existing companies.

Assuming you have a name that you’re okay to use, you may want to protect that name while you prepare to file your formation documents. You can do that with South Carolina’s Application to Reserve Corporate Name form, which gives you a 120-day name reservation in return for a $10 filing fee.[5]

While name reservation protects your business name for a few months, you don’t officially claim that name until you file to create your S corporation in South Carolina.

After filing, getting a trademark for your name and any other marks unique to your business is a wise idea. With a trademark, you won’t have to go through costly and long-winded legal battles if you catch somebody misusing your name.[6] Note that the trademark only applies to the state of South Carolina unless you register a federal trademark.

Step 2: Appoint Directors and a Registered Agent

Even if you have an LLC that you’re turning into an S corp, you need to elect directors to the business. South Carolina requires your S corp to have at least one director, though it has no rules on whether that director needs to be a South Carolina resident.[7]

Remember the 5% tax withholding condition mentioned earlier is if you choose non-resident S corp directors. In most cases, S corps choose their directors from their pool of S corporation shareholders.

South Carolina also requires all businesses to have a registered agent who maintains a physical presence in the state. This presence is required so you always have somebody on hand to receive legal documents, such as service of process, and communications from the Secretary of State.

Your South Carolina registered agent must meet the following requirements:

• Be an individual or business entity with a physical presence in South Carolina

• Have a physical street address that they register with the Secretary of State (a mailing service of P.O. box is not acceptable)

• Maintain normal business hours so they can receive documents on your behalf

You can serve as your own registered agent in South Carolina, though doing so isn’t advised. Registered agents have a lot of administrative duties, in addition to losing out on privacy due to their addresses being on the public record.

For these reasons, many companies opt to use a South Carolina registered agent service, like that offered by Swyft Filings. Our registered agents give your S corp a physical presence in South Carolina, with our online dashboard ensuring you have immediate access to all documents for your company. 

Step 3: File Articles of Organization

With a name, directors, and registered agent ready, you can move on to officially creating your business. To do that, you must submit the relevant formation documents and a filing fee to the Secretary of State.

The documents you submit differ depending on your business entity. LLCs must file Articles of Organization, with corporations filing Articles of Incorporation. Both are on the Secretary of State’s Business Entities Online website, with both forms asking for general details about your proposed business.

You can submit all of your forms online via the Business Entities Online website, assuming you create an online account, or send them via mail to the following address:

South Carolina Secretary of State’s Office

Attn: Corporate Fillings

1205 Pendleton Street, Suite 525

Columbia, SC 29201

In either case, you must submit the forms with a filing fee of $100.

Assuming you’re successful in your application, you’re in good standing and can transact business in the state of South Carolina. You don’t have to worry about filing annual reports to maintain this good standing if you have an LLC.

However, if your business is a C corp or S corp, you must submit an annual South Carolina Corporation Income Tax Return, which includes an annual report on your business. Failure to submit this report could lead to several consequences for your company, including fines and the dissolution of your business.

Step 4: Create an S Corp Operating Agreement

If you’ve formed a C Corp, your company’s bylaws are outlined as part of the business creation process. That isn’t the case for LLCs, which can take a more freeform approach to their management structure. You need to create an operating agreement to outline your bylaws on paper.

An operating agreement is a legal document that business owners use to create bylaws, define LLC members’ roles and membership stakes, and handle any other aspects of running their business that they’d like to have on paper.

The state of South Carolina doesn’t require LLCs to have operating agreements. Still, it’s a good idea to create one for the following reasons:

• Lower the possibility of internal disputes arising

• Outline processes for the sale of the company

• Customize business operations rather than following South Carolina’s default rules

• Solidify the liability protection offered to members and shareholders

Step 5: Apply for an Employer Identification Number

When you complete your personal income tax return, you’re asked to enter your Social Security Number. The IRS uses this unique identifier to determine who you are to ensure your taxes go to the right place.

An Employer Identification Number (EIN) serves a similar purpose for your business. This unique nine-digit code is a legal requirement for any company paying employment taxes.

But even if your S corp doesn’t have employees, as may be the case for a sole proprietorship or single-member LLC, it’s still a good idea to get an EIN for the following reasons:

• Most banks only allow you to open business bank accounts if you show them you have an EIN

• An EIN improves your credibility among other business owners (and customers)

• Applying for an EIN early in your company’s life means you don’t have to worry about doing it when you’re ready to hire employees

If you’re ready to get your EIN, we’ll obtain one for you in as little as 10 minutes. The IRS also has a real-time application, which you can access via its website. 

Step 6: File Form 2553 for S Corporation Election

You’ve finally reached the last step in your journey to achieve S Corp status. With your business formed, you must complete the S Corporation election process to make your S Corp status official.

Assuming you meet the IRS’s requirements, getting S corp status is a simple process that requires you to file Form 2553, an Election by a Small Business corporation with the IRS.[8] You have until two months and 15 days into the current tax year to file this form, which allows you to select your S corp shareholders and change your tax classification.

If you have a C Corp and miss the deadline, your application for S Corp status comes into force in the next tax year. For LLC owners, you may submit Form 8832, Entity Classification Election, and Form 2553 after the two-month and 15-day deadline.[9] Form 8832 allows you to reclassify your LLC business entity as a corporation, with the form giving you the option to elect S corp status after the deadline. 

South Carolina S Corp vs. South Carolina LLC

S Corporation election is an attractive prospect for C Corp business owners who want to take advantage of pass-through tax treatment. However, those with a South Carolina LLC may wonder if it’s worth trying to achieve S Corp status. The pros and cons of S Corp and LLC status outlined below should help you decide.

Advantages of Starting an LLC in South Carolina

• A limited liability company can have as many members as possible without restrictions

• You get some personal liability protection with an LLC

• Pass-through tax treatment applies to LLCs, though members may have to pay higher self-employment taxes than S corp shareholders

Disadvantages of Starting an LLC in South Carolina

• Personal liability protection in an LLC doesn’t extend as far as in an S corp

• LLCs often dissolve if a member leaves or sells their ownership stake

Advantages of Forming an S Corporation in South Carolina

• S corps offer a more permanent structure, which is attractive to investors

• You can choose pass-through or entity-level taxation when forming an S Corp in South Carolina

• S corps offer corporate-level liability protection to shareholders

Disadvantages of Forming an S Corporation in South Carolina

• You must abide by strict rules to form an S corp in South Carolina

• S corps have to submit annual reports, whereas LLCs don’t

Ready to File for S Corp Status in South Carolina?

With the six steps shared in this article, you have all the information you need to form an S corporation in South Carolina. Small business owners can use these steps to determine their eligibility and handle their filing requirements.

But you may need a helping hand to achieve S corp status. And that’s where Swyft Filings comes in.

Before you can file for S corp status, you need to create a valid South Carolina company. We can help with that before moving on to handling the S corp filing process on your behalf. We draw from the experience we’ve gained by helping over 250,000 companies, ensuring we achieve S corp status for your business in as little as 10 minutes.

If you’re worried about S corp limitations and how they affect your business, use Swyft Filings’ S corp formation service today.

Frequently Asked Questions

What is an S Corporation in South Carolina?

An S corporation is a business classification that has pass-through tax status. South Carolina offers its S corps the option of getting taxed at the entity level.

Does South Carolina recognize S Corporations?

Yes, South Carolina recognizes S corps that abide by the Internal Revenue Code.

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

The IRS may take up to 60 days to respond to an S corp application.

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

An LLC is a business entity or structure, whereas an S corp is a tax classification.

What are the requirements for an S Corporation in South Carolina?

South Carolina requires S corps to meet the IRS’s requirements and pay an annual License Fee.

Are taxes for LLCs and S Corps the same?

Sometimes, although LLC members often pay more in self-employment taxes than S corp shareholders.

What is the S Corp tax rate?

In South Carolina, S corps can either pay business tax at the entity level at a flat rate of 5%, or each shareholder can pay taxes based on their personal income tax rate.

How do I dissolve an S Corporation in South Carolina?

You must file Articles of Dissolution with the South Carolina Secretary of State.

Bibliography

1. Tax Foundation. “Taxes in South Carolina.” Accessed March 28, 2023.

2. South Carolina Department of Revenue. “S Corporation.” Accessed March 28, 2023.

3. South Carolina Department of Revenue. “S Corporation Income Tax Return.” Accessed March 28, 2023.

4. Internal Revenue Service. “S Corporations.” Accessed March 28, 2023.

5. South Carolina Secretary of State. “Downloadable Paper Forms.” Accessed March 28, 2023.

6. South Carolina Secretary of State. “Trademarks.” Accessed March 28, 2023.

7. South Carolina Legislature. “Title 33 – Corporations, Partnerships, and Associations.” Accessed March 28, 2023.

8. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed March 28, 2023.

9. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 28, 2023.