S corporations must maintain strict compliance Accounting Errors with IRS regulations and corporate formalities, creating administrative overhead for small business owners. Annual filing requirements include Form 1120-S (the S corporation tax return) and Schedule K-1 forms for each shareholder. Missing deadlines or filing incorrectly can result in penalties or potential loss of S corp status. Many small business owners begin operations as sole proprietorships or partnerships because they don’t require any paperwork to establish. As your business grows, it often becomes beneficial to upgrade to an entity that offers limited liability protection, which shields your personal assets from your business debts. One of the key features of an S-corporation election for a corporation is pass-through taxation.

Big-Business Tax Secrets Solopreneurs Can Use Too

• This simply means that the company itself will be held liable to clear debts and other finances instead of the investors and shareholders.
• You can check out our state-specific guides to LLC formation, including our list of the best LLC formation services for those who don’t want to do it themselves.
• See our how to choose a business structure guide to see if an s corp is right for you.
• Owners should consult with legal and tax professionals during the business formation process.
• You don’t need to renew your S-corp election each year, but you do need to make sure your business continues to meet the requirements for shareholders and stock.
• ” It’s always a good idea to talk to an experienced business accountant before you make a decision.

This tax arrangement works well for many LLCs, but as the business becomes more profitable it may make sense to consider electing S-corp taxation. With S-corp status, owners can be company employees, as long as they pay themselves a reasonable salary. The salary is subject to traditional payroll taxes and is considered a company expense. Any additional profit is not subject to self-employment taxes, potentially saving the owners money.

Single-Member LLC Taxes

• An LLC, or limited liability company, is a legal business structure that protects the owner’s personal assets from the company’s debts.
• The cash method of accounting can be used by S corporations, which is easier than the accrual method.
• That said, a business entity can be domiciled (i.e., registered as a domestic entity) in any state even if they don’t have operations there.
• This document outlines essential information about your company, such as its name, purpose, structure, and initial directors.

For new corporations, the tax year almost never begins on January 1. It’s always a good idea to file the election early so you don’t have to worry whether you made it in under the deadline for your first tax year. For years, small businesses complained that double taxation was making it hard for them to succeed.

Step 2. Get a Federal Tax ID Number

If you add an ineligible shareholder (such as a citizen of a foreign country), have more than 100 shareholders, or add a class of preferred stock, your corporation’s S election will be revoked by the IRS. In addition, the corporation will generally be prohibited from making a new election for five years. A registered agent is a person or company that a business appoints to receive service of process and other important legal and tax documents. You will need to obtain a registered agent in your state of incorporation and any additional states the S corporation will be registering to do business. A guide to help business owners decide which business structure is right for them, and how to start a corporation or LLC.

Steps to Forming an LLC and Electing S Corp Status

If you are just getting started with your business and are still unsure about how much income your LLC will generate, you may want to consider holding off on setting it up as an S-corp. To elect S-corp taxation, you must file Form 2553, Election by a Small Business Corporation, with the IRS. The form must be filed within 2 months and 15 days after the beginning retained earnings balance sheet of the tax year when the election will take effect, or at any time during the preceding tax year. See the instructions for Form 2553 for a description of how to calculate the deadline for your business and fill out the form.