Everything About S Corporation Formation In 2022

In the US, there are 3 main company types: LLC, C-corp and S-corp. While each type has its own pros and cons, S corporation may be the most interesting because it offers the protection of an LLC while also providing the tax benefits of a corporation. This article will discuss some notable features of S corp formation.

S corp formation

What is an S Corporation?

S corporation (S corp) refers to a type of corporation in the US that elects the S corp tax status. This can protect the corporation’s owner by limiting their liability while allowing them to pay individual income taxes and avoid the double taxation problem that a conventional business faces.

If a business entity meets the requirements of the Subchapter S of the IRC (Internal Revenue Cost), it can gain some (but not all) tax-exempt incentives like a partnership entity, while enjoying the regular benefits of a corporation. At the corporate level, an S corp is not required to pay taxes. Instead, it files an informative tax return and passes on its profit or loss to its owners' individual tax filings.

What are the eligibility requirements for an S corporation?

The eligibility requirements for an S corporation

To set up an S corp, you need to meet certain IRS qualifications. It’s important to understand what the eligibility requirements for an S corporation are.

Here are listed main prerequisites:

• Being domestically incorporated (within the U.S)
• Issue only one class of stock
• Having maximum 100 shareholders
• Having shareholders that fulfill specific qualifying criteria (nonresidents, partnerships, or corporations can not be a shareholder)
• Having agreement for S corp election from all the shareholders
• Assemble a board of directors
• Record minute meetings

S corp formation checklist

Obtaining all the IRS requirements is just the first step of S corp formation. That is why having an S corp formation checklist is recommended. There may be variety of requirements from one state to another, but here are the fundamental steps listed in the S corp formation checklist for you to follow:

1. Decide a name for your business

The very first step is to give your business an official name. In some states, businesses may be required to put an identifying term or abbreviation at the end of the name for corporation recognition purposes.

2. Check if the name is not already taken by another business

Next, check to see if the name you've picked is still available. You want to ensure that no other company has the same – or a name that is too close to what you have selected. A properly unique name can help to impress your customers and investors.

3. Choose the state for your S corp formation

In general, you should create your Corporation in the state where you have a physical presence.

If you do not intend to have a physical presence in the United States for your business, you should consider incorporating in Delaware, the most business-friendly state for non-US residents.

4. File and submit the Articles of Incorporation

This is an essential document and needs to be professionally drafted. Once the documents are ready they must be submitted with the Secretary of State's Office.

Some filing fee may be required.

5. Determine the board of directors

Determining who will be the directors of your business. The board of directors and also the shareholders must meet these criteria: must be individuals, specific trusts and estates, or certain tax-exempt organizations.

6. Keep minutes of all shareholder and board meetings.

If your S corp is formed from a C corp, the S corp formation checklist will include this step because it’s obligated to hold board meetings and collect consent for an S corp election from all shareholders.

7. Get an EIN and File Form 2553 to Elect S Corp Tax Status

Following the formation of your S corp, you must complete and submit Form 2553 to the IRS within two months and 15 days of the start of your selected tax year, or at any time during the tax year before your S corp's first effective tax year.

S corp formation checklist and documents

S corp formation documents

There are many documents you have to prepare and submit in the process of S corp formation. However, in the checklist above, you can see that Articles of Incorporation and Form 2553 are the two most important S corp formation documents.

1. Articles of Incorporation:

To found an S Corp, you must first file Articles of Incorporation with your state authority. Articles of Incorporation are official documents that contain information about the company. The files contain information such as:

• The name and address of the company
• Directors, shareholders, and officers
• The objectives of the business
• The amount of stock that will be issued

2. Form 2553:

The most important file in S corp formation documents is form 2552. It is required for S corp tax status election. Form 2553 must be completed and submitted to the IRS between two months and fifteen days after the start of your selected tax year, or at any point during the tax year before your S corp's first effective tax year.

When submitting Form 2553, you must include the following information:

• Name of your business
• Physical address
• EIN (Employer Identification Number)
• The state of your S corp
• Date of incorporation
• Effective date of S corp election
• Shareholders’s information
• Information about fiscal tax year
• All shareholders’s signature

S corp formation cost

S corp formation cost varies depending on the state and industry you incorporate in. In general, filing expenses, legal fees (maybe if you need your documents to be legally reviewed), and license fees make up the total S Corp formation cost.

However, in One IBC, we have the stable price range for your reference. Particularly, formation cost will consist of service charge and government fee, total cost varies from US$ 889 to US$ 1445. For more detailed and specific cost for each state, you can refer to the US company formation cost here.

In conclusion

Successfully form an S corp in 2022

There are 2 main ways to set up an S corp:

1. Start with an LLC and select your S corp tax status from the IRS when request your EIN (Employer Identification Number)
2. Form a C corp and elect the S corp status with IRS

You should keep in mind that these above features of information are for general reference, and may vary depending on the way you form your S corporation, the state you choose, the industry your company is running, etc.

S corp formation will be a great move for your business’s development. If you need further information and professional consultancy, you can directly contact One IBC. Our experts are always ready to help.