If you're the owner of a small business, then there's no doubt that you've heard the term S corp bandied about.
You may have heard of all of its benefits, like tax cuts, asset protection, and simper ownership.
The only thing that stands as an obstacle between you and all these advantages is the daunting prospect of now knowing how to file an s corp.
In this post, we'll clear that up. Keep reading to learn how to become an S Corp and what you need to know.
What is an S Corporation?
To understand what an S Corp is it's helpful to understand what an S corp isn't.
The standard type of corporation that you'll most often hear about is the C Corp. The primary distinguishing feature of the C Corp is that it is subject to corporate income taxes. The S Corp, on the other hand, is generally exempt from most income taxes that a C Corp has to pay.
However, there are pretty strict requirements for an organization to be recognized as an S Corp. After all, if everyone could incorporate their organization in a way that allows them to avoid sending a portion of their hard-earned cash to the IRS, why wouldn't they?
Requirements to be an S Corp
There are multiple different stringent criteria that an S Corp must meet. The full unabridged version is available on the IRS website, but we've paraphrased it into readable English for you here.
Shareholder Limitations — An S Corporation is limited to a maximum of 100 shareholders. Any more and the subchapter corporation loses its status as such. In addition to restrictions on the number of shareholders, S Corps can also have only certain types of shareholders.
Allowable shareholders include trusts, individuals, and certain estates. No other corporations, or foreign individuals, or partnerships are allowed to have a vested interest.
Domestic Operation and Ownership — The organization must be a domestic one, not operating internationally or owned by foreign investment. The latter rule, in particular, should be obvious, as it doesn't make sense for the American government to subsidize profits fora company where the profits will be leaving the United States and returning to foreign investors.
Not in a Disallowed Industry — There are several disallowed industries that do not qualify to be an S Corporation. The main ones are insurance, banking, and international sales.
How to File an S Corp
The first step in answering the question of how to form an s corp is to gather together all necessary documents for setting up an S corp. The most important of these documents if Form 2553, available on the IRS website.
There are four individual parts to the process of filling out the Form 2553 document.
The first one is basic biographical information about your company (name, location, personnel, identification number, etc.).
Part II goes into accounting-related questions, such as the selection of your company's fiscal year.
Part III asks questions that only a trust that seeks to qualify as an S Corp must fill out.
Finally, Part IV is for those companies that happen to be filing late.
The above form doesn't apply if you're applying as an LLC instead of as a C Corp. If you're already an LLC and looking to move to S corp, then file Form 8832.
Start Your Subchapter Corporation
Now that you know how to file an S Corp, it's time for you to gather your documents, grab the right form, and begin the filing process.
Remember to ask for help from professional consultants if you need any help with the process of filing for a subchapter corporation.
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