Starting an S Corporation (S-Corp) offers business owners tax advantages and liability protection. However, establishing an S-Corp requires following specific legal steps and understanding the tax benefits to maximize your savings. This guide will explain how to start an S-Corp in 2024, highlight key tax advantages, and provide insights into using services like Swyft Filings to streamline the process.
What is an S-Corp?
An S-Corp is a tax election made with the IRS, not a separate business entity like an LLC or C-Corporation. Businesses, whether LLCs or corporations, can elect S-Corp status. The main appeal of an S-Corp is that it allows owners to reduce their tax burden while benefiting from limited liability.
Why Choose an S-Corp?
The S-Corp structure offers multiple benefits:
- Pass-Through Taxation: Profits and losses pass directly to the owners’ personal tax returns, avoiding double taxation.
- Reduced Self-Employment Taxes: Only the salary you pay yourself is subject to payroll taxes. Profits distributed as dividends are not subject to self-employment taxes.
- Limited Liability Protection: Owners’ personal assets are protected from business liabilities.
Legal Steps to Starting an S-Corp in 2024
Starting an S-Corp requires completing several legal steps. While the process is straightforward, following these steps carefully is crucial to avoid delays or legal issues.
Choose a Business Name
Your first step is selecting a name for your business. The name must meet your state’s guidelines and include terms like “Corporation,” “Incorporated,” or their abbreviations (Corp., Inc.). You’ll also need to make sure another business is not already using the name in your state.
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Register Your Business Entity
An S-Corp isn’t a standalone entity; you must first form a corporation or an LLC.
- If you choose to form a corporation, file Articles of Incorporation with your state’s business division.
- If you choose to form an LLC, file Articles of Organization with the state.
For more detailed guides on forming an LLC in each state, check out this resource:
At this stage, your business is still treated as a regular corporation or LLC. You’ll officially elect S-Corp status later with the IRS.
Get an EIN (Employer Identification Number)
You’ll need to obtain an Employer Identification Number (EIN) from the IRS. This unique number identifies your business for tax purposes and is necessary for filing taxes, hiring employees, and opening a business bank account. You can easily apply for an EIN online through the IRS website for free.
File IRS Form 2553 for S-Corp Election
To elect S-Corp status, you must file IRS Form 2553. This form officially informs the IRS that you want your business to be taxed as an S-Corp.
- Deadline: Form 2553 must be filed within two months and 15 days of starting your business for the election to be effective for that tax year.
- Signatures: All shareholders must sign the form.
Once the IRS approves your application, your business will be treated as an S-Corp for tax purposes.
Create Corporate Bylaws (for Corporations)
Corporations must adopt corporate bylaws that outline how the business will be run. This includes information on decision-making processes, officer elections, and how meetings are conducted. Bylaws help ensure the corporation follows formal procedures, protecting the liability shield for owners.
Bylaws are not required for LLCs that elect S-Corp status, but they can still be useful for outlining the business’s operational guidelines.
Issue Stock (for Corporations)
S-Corps must issue stock to shareholders. You will need to decide how much stock to issue and assign ownership percentages. Keep in mind that S-Corps are limited to 100 shareholders, and all shareholders must be U.S. citizens or residents.
Hold Annual Meetings and Keep Minutes
S-Corps are required to hold annual shareholder meetings and maintain meeting minutes. These formalities help make sure that the business is treated as a separate entity from its owners, which is essential for maintaining liability protection.
Tax Benefits of Starting an S-Corp
One of the biggest reasons to start an S-Corp is the tax advantages it offers. Let’s look at the key tax benefits:
Pass-Through Taxation
S-Corps enjoy pass-through taxation, meaning the company itself doesn’t pay federal taxes. Instead, the profits and losses are passed through to the owners, who report them on their personal tax returns. This structure avoids the double taxation that C-Corps faces, where the corporation and shareholders both pay taxes on profits.
Reduced Self-Employment Taxes
The main reason many small business owners elect S-Corp status is to reduce self-employment taxes. In an LLC, all profits are subject to self-employment taxes. In an S-Corp, the owner only pays payroll taxes on their salary, while the remaining profits (distributions) are not subject to these taxes.
Reasonable Salary Requirement
While S-Corps reduce self-employment taxes, the IRS requires that owners pay themselves a “reasonable salary” based on the market value of their work. This salary is subject to payroll taxes, but any remaining profits can be taken as distributions, which are not.
No Corporate Tax
Unlike C-Corps, S-Corps doesn’t pay corporate income tax at the federal level. This further reduces the overall tax burden for the business and its owners.
Deduction for Employee Benefits
S-Corps can deduct employee benefits such as health insurance premiums. These deductions help reduce the company’s taxable income.
How Swyft Filings Can Help You Start Your S-Corp
Starting an S-Corp involves paperwork and compliance with state and IRS regulations, which can be time-consuming and complicated. Swyft Filings is a popular service that simplifies the process by handling all the legal steps for you.
Key Services Offered by Swyft Filings:
- Formation Filing: Swyft Filings handles the registration of your business entity, whether you’re forming a corporation or an LLC. They file all necessary documents with your state.
- S-Corp Election Filing: Swyft Filings can help you file IRS Form 2553 to elect S-Corp status on time.
- Registered Agent Services: Swyft Filings offers registered agent services to ensure your business receives legal documents in compliance with state laws.
- Compliance Reminders: They provide reminders for annual reports, tax deadlines, and ongoing compliance requirements so you never miss an important deadline.
Using a service like Swyft Filings can save you time and reduce the risk of making costly errors during the formation process. They handle the heavy lifting, allowing you to focus on running your business.
Guide to S-Corp & Tax Guides
If you’re considering electing S-Corp status, understanding the tax implications is crucial. S-Corps offer tax advantages, but it’s important to follow IRS guidelines carefully. To help navigate these complexities, you can explore comprehensive guides on how to form an S-Corp and understand its tax benefits here:
Common Mistakes to Avoid When Starting an S-Corp
When starting an S-Corp, it’s important to avoid common pitfalls that could lead to penalties or loss of S-Corp status. Here are a few mistakes to watch out for:
Failing to Pay a Reasonable Salary
The IRS requires that S-Corp owners pay themselves a reasonable salary based on the market rate for their role. If you pay yourself too little to avoid payroll taxes, it could trigger an audit.
Missing the S-Corp Election Deadline
You must file IRS Form 2553 within two months and 15 days of forming your business to elect S-Corp status. Missing this deadline means your business won’t qualify for S-Corp tax treatment until the following year.
Not Following Corporate Formalities
S-Corps are required to hold annual meetings, maintain meeting minutes, and keep detailed records. Failing to follow these formalities can put your liability protection at risk.
Exceeding the Shareholder Limit
S-Corps can have no more than 100 shareholders, and all must be U.S. citizens or residents. Exceeding this limit will result in the loss of S-Corp status.
Conclusion
Starting an S-Corp in 2024 is a smart move for business owners looking to reduce their tax burden and protect their personal assets. By following the legal steps—selecting a name, forming your entity, electing S-Corp status, and complying with IRS rules—you can set your business up for success.
For those looking to streamline the process, using a trusted service like Swyft Filings can simplify the paperwork, ensure deadlines are met, and provide peace of mind. Whether you’re just starting out or looking to convert your existing business into an S-Corp, Swyft Filings makes the process easier by handling the legal details. By understanding the tax benefits and avoiding common mistakes, you can take full advantage of the S-Corp structure and set your business up for long-term success.
