How to Start an S Corporation in 3 Steps
TLDR: An S Corp is a federal tax election, not a standalone business structure. To start an S Corp, first form a corporation, file IRS Form 2553, and stay current with ongoing compliance requirements. Harvard Business Services can help establish the underlying corporation and provide Registered Agent service.
If you are researching how to start an S Corp, the first thing to understand is that an S Corporation is generally a federal tax election, not a separate type of business entity. Typically, a business first forms a corporation under state law and then elects S Corporation tax treatment with the IRS. Here is how the process works.
What Is an S Corporation?
An S Corporation, commonly called an S Corp, is a business that has elected for pass-through taxation, meaning shareholders generally report their share of the business's income on their individual tax returns. This structure can help qualifying corporations avoid the double taxation commonly associated with C Corporations.
Before making an S Corp election, a business must meet IRS eligibility requirements. Generally, it must:
- Be a domestic corporation or other eligible domestic entity
- Have no more than 100 shareholders
- Have only allowable shareholders, with certain restrictions on entities and nonresident aliens
- Have only one class of stock
- Not be an ineligible corporation under IRS rules
- Have all shareholders consent to the S Corporation election
How to Start an S Corp in 3 Steps
Step 1: Form a Corporation
You need an underlying legal entity before making an S Corp election. Many business owners begin by forming a corporation in their chosen state. For example, forming a Delaware corporation typically involves selecting an available business name, appointing a Delaware Registered Agent, and filing the appropriate formation document with the Delaware Division of Corporations.
Harvard Business Services, Inc. can help entrepreneurs form a Delaware corporation and provide the Registered Agent service required to maintain the entity in Delaware.
Step 2: File IRS Form 2553
The key step in electing S Corp status is filing IRS Form 2553, Election by a Small Business Corporation. All shareholders must consent to the election. After submitting the form, the IRS reviews it and sends the company a notice that the election has been accepted or rejected.
Because S Corp elections can have significant tax consequences, business owners often work with a qualified tax professional when determining if and when an election makes sense.
Step 3: Maintain S Corp Compliance
Electing S Corp status creates ongoing responsibilities. A Delaware company with S-Corp tax status generally has to maintain compliance with both federal and state requirements. This means that the company must remain a domestic entity, have no more than 100 shareholders, have only eligible shareholders, and maintain only one class of stock. The company must also continue meeting its federal tax obligations while satisfying state-level requirements, such as maintaining a Delaware Registered Agent and meeting applicable Delaware filing requirements.
When Does S-Corp Tax Status Make Sense?
Businesses may want to explore S-Corp tax status to learn more about its potential benefits. Depending on the company’s profits, ownership structure, and the owners’ personal taxes, the benefits of an S-Corp may vary. Owners who are comfortable with the associated tax filing and compliance requirements should explore this option with a qualified tax professional to ensure a smooth transition.
If you are ready to establish the legal foundation for your business, Harvard Business Services, Inc. can help you form a Delaware corporation and provide Delaware Registered Agent services for the life of the company. Once your entity is formed, you can work with your tax professional to determine whether an S Corporation election is appropriate for your business.
Frequently Asked Questions
How much does it cost to start an S Corp?
Formation costs usually depend on the underlying entity, state filing fees, and Registered Agent costs. The cost to form the underlying corporation using one of the packages at Harvard Business Services, Inc. starts at $229 and includes 1 year of Delaware Registered Agent service. After that, electing S-Corp tax status is done by filing Form 2553 directly with the IRS. The IRS generally does not charge to file this form.
Who can own an S Corporation?
An S Corporation can have up to 100 shareholders. Most U.S. citizens or resident individuals are typically considered eligible owners. Note that corporations and nonresident aliens generally cannot own shares in an S Corporation.
When do I need to file Form 2553?
Form 2553 generally must be filed within two months and 15 days after the beginning of the tax year when you want the S Corp election to take effect. Certain businesses may qualify for late-election relief.
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