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Registering your business as an S Corporation (S Corp) can be an advantageous move that can significantly increase your savings.
Whether you’re a business owner or entrepreneur or an entrepreneur founding your first start-up, you need to know how to start an S Corp.
Financial documentation and dealings can be a complicated matter.
While it is relatively easy once you understand the process, you might be wondering just how you can start an S corp if you don’t have a sound foundation or background in finance or taxation.
To help you out, I’ve put together this helpful guide to show you the exact steps you need to take.
This guide will cover:
- 7 simple steps to setting up an S Corp
- The S Corporation’s requirements
- Whether an S Corp is right for you.
The 7 steps to setting up an S Corp
- Choose your business name
- File formation documents
- Appoint a registered agent
- Create an operating agreement
- Obtain EIN and acquire licenses and permits
- Create S Corp bylaws
- File form 2553
1. Choose your business name
The first step towards setting up an S Corp is picking a name for your business.
Choose a unique, professional, and easy-to-recognize name that encapsulates your business and its dealings.
2. File formation documents
Once you have chosen a name, the next step is to file the formation documents to formally establish your company in your state.
This includes your articles of incorporation which include general information about your business such as the name, purpose, and location.
3. Appoint a registered agent
Setting up an S Corp requires you to appoint a registered agent.
A registered agent is a business or individual that you appoint to receive mail, legal notices, and service of process on your business’s behalf.
All states require businesses to appoint a registered agent, so make sure that you choose wisely.
4. Create an operating agreement
Once you have appointed a registered agent, the next step towards starting an S corp is to create an operating agreement.
This is a foundational document that will dictate how your business will run and will structure the company and its members.
5. Obtain EIN and acquire licenses and permits
The next step is to obtain an EIN and acquire the necessary licenses and permits required to operate as a business and an S Corp.
An EIN is an Employee Identification Number, which is used by the government for tax purposes.
6. Create S Corp bylaws
Next, you will be required to create S Corp Bylaws. These are a set of rules created by your business’s board of directors that work to protect the shareholders and the business itself.
7. File form 2553
Finally, you will need to file Form 2553. This is the paperwork that allows your business to become an S Corp and ensures you have the correct foundations to proceed.
The key document that you will need to file is Form 2553, which elects S Corp status for your company.
The specific instructions for filing Form 2553 can be found here on the IRS’ website.
After filing this document, you will also need to file an annual tax return for your business.
QuickStart: You can always use a business formation service like incfile to help you with the steps above and ensure that all your bases are covered!
S Corporation Requirements
There are several requirements your business must meet to become an S Corporation.
- Your business needs to be a domestic corporation.
- Your shareholders are “allowable,” meaning that they are individuals, estates, and certain trusts.
- There are no more than 100 shareholders in your business.
- To not be what is deemed as an “ineligible corporation eg, insurance companies, domestic international sales corporations, or some types of financial institutions.
- Your business only has one class of stock.
Is an S Corp right for me?
Well done – you now know how to start an S Corp in seven simple steps! However, you may be wondering if an S Corp is right for you.
An S corp essentially allows the revenue of your business to pass directly through to the owner’s income, which prevents the money from being subject to corporate taxes.
If your business turns over a large amount of profit, then an S Corp can save you a significant amount of money once tax season rolls around.
Therefore, if your business meets the criteria and you want to save money that would otherwise be going towards corporate taxes, an S Corp could be the right option for you.
What is an S corporation?
An S Corporation, also known as an S Corp, is a corporation that allows its profits and costs to pass through to its owners and shareholders to be exempt from certain types of corporate tax.
Is an S corp better than an LLC?
Neither an S corp nor an LLC is inherently better than the other; they simply suit different types of business.
If your business is a sole owner business, then an LLC may be more appropriate.
If you have multiple shareholders, an S Corp is likely the best structure for you.
Can I create an S corp for myself?
Absolutely! If you have a business or a business idea that meets the requirements for an S corp, you can certainly set one up by yourself.