Turning a business entity into an S corp for tax purposes comes with many perks. To enjoy these benefits, a company has to go through a certain process and properly complete all requirements.
Understanding What An S Corp Is
One of the key features that distinguish the Subchapter S corporation is the tax advantage that it provides. Under the Internal Revenue Code, companies taxed under Subchapter S are considered pass-through entities when it comes to taxation.
To qualify for the election of this tax code, a company needs to ensure the following:
- The company is either a U.S. LLC or C Corp.
- It maintains only one class of stock.
- It has a total of 100 shareholders or less.
- Only individuals, estates, and qualified trusts can be shareholders.
- Shareholders should be a U.S. citizen or a permanent resident alien who has a valid U.S. social security number.
- All shareholders signed a written consent regarding the S corporation election.
Knowing the Advantages of this Tax Code Status
There are a lot of benefits a company can enjoy once it elects S Corp tax status. Make sure that they align with the company’s goals, both short- and long-term.
- Asset Protection – As stated earlier, shareholders of S Corps have limited liability protection. That is because these companies are treated as separate legal entities. Shareholders will not be held personally liable for any of the actions and debts of the business.
- Pass-Through Taxation – Being a pass-through entity for business purposes means that the company will not be taxed at a corporate level, which is something that happens to C Corps. Instead, the shareholders report business income and losses on their individual tax returns.
- Salaries and Dividends – Another reason why many companies find the S corporation status appealing is that it allows owners to receive both salaries and dividends as payment from the business. Since dividends are not subject to self-employment taxes, it allows the owners to save a few bucks. S Corps are also allowed to deduct the cost of wages paid when computing the income the company passed through to the owners. However, it is important to note that the IRS should find the division between salary and dividends reasonable.
- Easy Way of Converting – S Corp is not a business entity legal structure. It is a tax code status. So, it is easy to convert the taxation treatment of the company depending on its circumstances. For example, S Corps can simply file conversion with the IRS if it thinks being taxed as a C Corp is more suitable. They also need to abide by state laws and regulations.
Starting S Corps
Companies that decide to elect S corporation status need to complete three basic steps. Doing this will ensure compliance and prevent any issues.
Step 1: Create a business entity.
Since S corporation is only a tax code, it cannot serve as the official business structure of an entity. In most cases, companies would organize their business as an LLC or corporation.
The process of forming a business depends on the state. But, it often includes choosing a business name that complies with the state naming regulations, the appointment of a registered agent, filing of the Articles of Organization for LLCs or the Articles of Incorporation for C Corps.
Depending on the industry, activities, and geographical location, a company may also need to secure additional licenses and permits. Check these with state and local government agencies or departments. To ensure compliance and avoid any delays, it may be best to let a third-party organization like DoMyLLC handle the preparation and filing of formation documents. Our team of experts can also serve as a registered agent in all 50 states, as well as the District of Columbia.
Step 2: Find out if the company qualifies for S corporation status.
The IRS restricts certain types of companies from electing S corporation taxation. So, it is best to ensure that the company abides by the qualifications.
Step 3: Elect the tax status.
If a company is qualified to elect for the tax status, then it will have to complete and submit IRS Form 2253. Do this within the timeline restrictions.
- It is no later than 2 months and 15 days after the start of the selected tax year.
- Any time during the tax year before the year the S corp status takes effect.
Avoiding Any Delays
In some cases, the IRS may allow late S corporation filing. Having reasonable cause for the late filing is necessary. The IRS will evaluate the reasons and see if the company is qualified for the S corporation election.
Common reasons that often get approval include the following:
- The company president, executive officer, accountant, or a person in a similar position failed to file for the tax code election.
- The company or its owners were not aware that advanced filing is necessary or that they have to file for the election of S corporation.
While late election for the tax code may be possible, it is still better to do it without delays. Check the deadlines that the IRS has set and make sure that the company meets them to prevent any issues.
It would also help to get assistance from a reliable third-party organization like DoMyLLC. Our team of experts can help streamline the whole ordeal. We can handle business formation filings and even S Corp elections. Discuss your company’s needs with us and let us come up with a personalized solution that is based on specific circumstances.
We can also serve as a registered agent. It does not matter in which state the company will be formed. DoMyLLC is authorized to do business in all states, including the District of Columbia.
Hiring a business filing service company like DoMyLLC will also help reduce the risks of making filing mistakes and provide easy access to all important business files. It also prevents delays, missed deadlines, and incomplete documents.
Business Filing Section