This article will help you understand how to form an S Corporation in the United States of America. We will show you a step-by-step process of how to create an S Corporation in USA and all the documents and requirements needed. Without any further ado, let’s begin:
Table of Content
- What is an S Corporation?
- STEP ONE: Choose a Name for Your S Corporation
- Using an Assumed Business Name
- Step Two: Appoint A Registered Agent
- STEP Three: File Your Articles of Incorporation
- STEP FOUR: Draft Your Corporate Bylaws
- STEP FIVE: Apply for an EIN for your S Corporation
- Step SIX: Secure Municipal and Regulatory Licenses and Permits
- STEP SEVEN: Taxes Requirements/U.S. Income Tax Return for an S Corporation (Form 1120S)
- Shareholder’s Share of Income, Deductions, Credits, etc. (Schedule K-1)
- Employment Tax Forms
- State Taxes
- STEP EIGHT: Open an S Corporation Bank Account
- STEP NINE: Obtain a Business Phone Number
What is an S Corporation?
An S Corporation which is referred to as Small Business Corporation is a business elected for S Corporation Status through the IRS. This business status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure. Please note that S corporations are taxed under Subchapter S of the Internal Revenue Code (IRC).
How to Form an S Corporation in 10 Simple Steps
As a corporation, an S corporation is created through filing Articles of Incorporation with the Secretary of State or similar government body. It issues stock and is governed as a corporation, with directors, officers, and shareholders who function in the same manner as their C corporation counterparts. The owners (the shareholders) have the same protection from liability as shareholders of a C corporation. An S corporation shareholder’s personal asset, such as personal bank accounts, cannot be seized to satisfy business liabilities.
STEP ONE: Choose a Name for Your S Corporation
The first step in forming an S Corporation in a state like Illinois is to choose a name for the business and Under the US law, Your S Corporation name must be recognizably different from the names of other business entities already on file with the Illinois Secretary of State.
Names may be checked for availability by searching the Secretary of State Business Services name database. You may reserve a name for up to 90 days by filing an Application to Reserve a Name (Form LLC-1.15). The filing fee is $25.
Using an Assumed Business Name
You don’t have to use your official legal name registered in your Articles of Organization when you do business out in the real world. Instead, you can use an assumed business name, also called a fictitious business name, “DBA” (short for doing business as), or trade name.
A business name reservation form is exactly what it sounds like—it allows you to reserve a unique name for your business while you complete the incorporation process. This comes in handy because two businesses can’t have the exact same name in the same locality if it would cause confusion to consumers.
Most secretary of state offices have an online name search that you can use to find out which business names are available. If the business name you want to use is available, then you can ask the state to “reserve” it for a certain amount of time—usually 60 to 120 days. No other business owners will be able to claim that name during that time period.
Step Two: Appoint A Registered Agent
Next, you are required to choose a registered agent for your S Corporation. A Resident Agent is the person or company who receives your S Corporation’s documents, notices and legal mail (called Service of Process). Because of this, the Resident Agent must have an actual street address (PO boxes are not allowed by the state). Picture your registered agent as your company representative to the state.
It is important to note that not everyone can be a registered agent. For a person to be eligible to become a registered agent, the person or corporation must be a resident of Missouri. That is to say, the individual or corporation must have a physical address within the state.
If any member knows the ropes of being a registered agent, you may elect him or her rather than hiring one. This will help you save some dollars, especially if you are running a small business. However, hiring a seasoned registered agent offers tons of benefits like privacy and peace of mind. Please note that you, your friend or family members or a commercial resident agent are qualified to be your S Corporation’s Resident Agent.
STEP Three: File Your Articles of Incorporation
Articles of incorporation are the foundational document for C-corporations and S-corporations. You have to file these documents with the state for your corporation to exist. The information that goes into the articles of incorporation will vary based on what state you’re in, but it typically includes the following:
- Business’s name, address, and principal place of business
- Purpose of the corporation
- Number and type of shares (if the corp is issuing stock)
- Names and addresses of the initial board of directors
- Registered agent for the corporation (person or company who will accept official mail and legal papers on the company’s behalf)
- Name, address, and signature of the incorporator who is submitting the form (usually you, your attorney, or an incorporation service if you’re using one)
All states charge a fee (ranging from approximately $100 to $500) to process the articles of incorporation. Once the state processes it, they will send you a certified copy of the articles which confirms that they’ve approved your corporation to do business in the state.
STEP FOUR: Draft Your Corporate Bylaws
Corporate bylaws lay out how the shareholders, officers, and directors will split control within the organization and manage it on a day to day basis. Along with the articles of incorporation, corporate bylaws are the main organizational document for a corporation.
- Corporate bylaws usually contain the following info:
- Basic business information, like name, address, and principal place of business
- Frequency and procedures for shareholder meetings, board meetings, and annual meetings
- How directors and officers will be elected and replaced when there are vacancies
- Types of officers (e.g. CEO, CFO, CMO, etc.) and their responsibilities.
- Procedure for the board of directors to adopt resolutions
- Procedure for corporate record keeping, including frequency of audits
- Procedure for amending the articles of incorporation and bylaws
- Number, type, and authority to issue shares of stock
- Dissolution process
In it is important to state that despite the fact that many people confuse the articles of incorporation and bylaws, they serve different purposes. The first just sets up a skeletal outline for the corporation, while the latter includes all the details for managing and running the corporation on a daily basis.
STEP FOUR: Craft Your Operating Agreement
An Operating Agreement is a written contract among the partners of the business that clearly state who owns the S Corporation and how much of the S Corporation they own. Your Operating Agreement will also document how the S Corporation is managed, how profits will be shared, and how taxes are to be paid among other related issues.
The fact is that having an Operating Agreement for your S Corporation helps prove that the company is a separate legal entity from yourself. This helps maintain the personal asset protection provided by your S Corporation and is very beneficial to have if you ever end up in court.
“Internal Document”: An S Corporation Operating Agreement is an “internal document”, meaning, you don’t have to send a copy to the Department of Taxation, the IRS, or any other government agency. You just need to keep a copy of the Operating Agreement with your S Corporation business records and give a copy to the other Members, if applicable.
STEP FIVE: Apply for an EIN for your S Corporation
The next step you are expected to take is to apply for an EIN for your S Corporation (Don’t apply for an EIN until your S Corporation is approved by the Secretary of State). An EIN (Employer Identification Number) is obtained from the IRS after your S Corporation is approved by the Secretary of State. An EIN is also called an EIN Number, FEIN, Federal Employer Identification Number, or a Federal Tax ID Number. They all mean the same thing.
You can liken your S Corporation’s EIN Number as the company’s “social security number”. It helps identify your S Corporation to the IRS for tax and filing purposes. Please note that your S Corporation’s EIN will also be used when you open an S Corporation bank account, register your S Corporation with the Department of Taxation, and to process employee payroll (if applicable).
Please note that an S corp. is required to file an annual federal income tax return, using Form 1120S, no later than March 15. The form must report the S corporation’s income, deductions, and credits.
Step SIX: Secure Municipal and Regulatory Licenses and Permits
Apart from the State Business License mentioned above, your S Corporation may also need to apply for municipal (county or city), as well as regulatory licenses and/or permits.
- Nature of business and location: These two factors will determine which licenses and permits your S Corporation may need to apply for.
- Common Business Registration: This tool, located within SilverFlume, will help you determine the licenses and permits your S Corporation may need, and which municipality and regulatory agency you may need to contact.
After you complete the Common Business Registration, look towards the bottom of your SilverFlume Dashboard. In the “External Tasks” section, you’ll find the information for the municipalities and agencies you may need to contact. You’ll just need to call them, explain what your S Corporation will do, and ask them what licenses and/or permits are required.
STEP SEVEN: Taxes Requirements/U.S. Income Tax Return for an S Corporation (Form 1120S)
In the United States, an S corp. is required to file an annual federal income tax return, using Form 1120S, no later than March 15. The form must report the S corporation’s income, deductions, and credits. This return is merely for informational purposes.
If the S corporation is unable to file its return by March 15, it must file Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns (Form 7004) to request a six-month extension. If it still has not submitted its return at the end of this time, the IRS assesses a minimum penalty for each month the return is late multiplied by the number of shareholders. The corporate shareholders are subject to the same deadlines as individual taxpayers, April 15.
An S corp. must send each shareholder a Schedule K-1, which shows that individual’s share of the corporation’s income, losses, deductions, and credits. This information comes from Form 1120S. Shareholders report the information found on Schedule K-1 on their individual federal tax returns. The S corporation must include a copy of each shareholder’s Schedule K-1 with its own corporate tax return.
Employment Tax Forms
The S corp. is subject to further filing requirements if it has employees. By law, it must withhold employment taxes—federal income tax, Social Security, and Medicare—from each employee’s paycheck. Further, if a shareholder is employed by the S corporation, the corporation must pay that individual a salary, which is also subject to employment taxes.
The S corporation must file quarterly employer tax returns using Employer’s Quarterly Federal Tax Return (Form 941). This form is due on January 31, April 30, July 31, and October 31.
Please note that, if the corporation pays wages of $1,500 or more during a calendar quarter or has at least one employee working part-time for 20 or more separate weeks, it must file Employer’s Annual Federal Unemployment Tax Return (Form 940). This form is due on January 31. If you deposit all your FUTA tax when it is due, you have until February 12 to file.
Depending on which state your S corporation is incorporated in, it may have to pay state taxes. In these states, the corporation must file a separate state income tax return. Some states may even require the S corp. to file an informational state tax return. Most states also collect employment taxes. It’s always a good idea to check with your state’s Department of Revenue or similar agency for more information.
STEP EIGHT: Open an S Corporation Bank Account
Once the IRS has issued an EIN Number to your S Corporation, you can open a business checking account. It’s best practice to have a business checking account for your S Corporation in order to maintain your personal liability protection. Using a personal bank account for your S Corporation is called “commingling of assets” and this can lead to personal liability issues if you end up in court.
Please note that having a separate business bank account for your S Corporation also makes record-keeping easier for accounting and tax purposes. Since banks in the United States has their own rules and regulations, it is recommend calling a few places to determine the following:
- minimum initial deposit
- minimum balance requirements
- monthly maintenance fees (if any)
Required S Corporation paperwork: In order to open a business bank account for your v, you’ll need to have the following:
- Articles of Organization (stamped and approved)
- State Business License
- Initial List of S Corporation Managers or Managing Members
- EIN Confirmation Letter from the IRS
- Photo ID (driver’s license and/or passport)
- Operating Agreement (it may not be needed, but it’s a good to bring anyway)
N.B: Call the bank ahead of time and double-check what documents are required.
STEP NINE: Obtain a Business Phone Number
In the United States and of course international best practices requires that you obtain a business phone number for your company as against making use of your own private number. You can get a local Illinois telephone number or you can get a “1-800” number for your business. There are many options to choose from when it comes to official phone number, but just ensure that you choose a telecom company that will better serve your business.
Aside from the documents and requirements stated above, you would also need Election by a Small Business Corporation (Form 2553). Form 2553 simply states a corporation’s intent to elect to become an S corporation. The form must be filed within two months and 15 days after the beginning of the tax year—or March 15, if the corporation follows the calendar year—in which the election is to take effect.
The form must list all corporate shareholders at the time of the election and each shareholder must sign and date the form. It takes about two months for the IRS to approve the filing. Over and above, forming an S Corporation is not a daunting task. Even after forming it, there are still some things you need to put in place before you commence operation.
Please, note that the information in this article is provided only for general purpose and it is no way a legal advice. No lawyer – client relationship is established or should any such relationship be assumed. For legal advice, please consult with a professional lawyer.
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