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To start an S corporation, use government resources to register, choose the right time for tax election, and make provisions for purchase. The process is the same as for any corporation, but with an additional step for election. The IRS restricts the number and type of owners, and a shareholder purchase agreement is recommended.
The best tips for starting an S corporation are to use government resources to register, select the right time of year to do the tax election, and make initial provisions for a purchase. An S corporation files a special federal income tax election with the Internal Revenue Service (IRS). The method for establishing an S corporation is the same as for any corporation, except for the additional step required for election.
Corporations in the US are formed under state law. A company chooses a state, files articles of incorporation with the commercial division of the secretary of state, and pays a registration fee. Once the state accepts the filing, the corporation is considered registered and officially in business. An S corporation starts out as a regular corporation and is formed by filling out standard paperwork with a state.
All states use the Internet to provide complete instructions and fill-in-the-blank templates for completing incorporation documentation. Creating an S corporation in any state is a simple matter of following the instructions and filling out some basic information on a form that can be downloaded from the state’s website. The best tip for any new business owner is to visit the website and file the paperwork yourself, without hiring a third party to manage the process.
An S corporation arises when a regular corporation makes an election under subchapter S under the US Internal Revenue Code with the Internal Revenue Service (IRS). One of the most important features of this election is that it changes the way the corporation is treated for federal income tax purposes. After the election, proceeds and losses are passed on to the corporation’s owners to be listed on their personal tax returns in proportion to their ownership interest, rather than the corporation filing a tax return of its own. This election can be made at any time during the corporation’s existence, but its effective date depends on the month in which the paperwork is filed. Another tip for creating an S company is to make the election within 60 days from the date of presentation of the articles of incorporation, so that it becomes effective immediately.
The IRS restricts the number and type of owners an S corporation can have. This is markedly different from common stock, which is freely transferable to any person or entity anywhere in the world. If shares in the S corporation are transferred to an ineligible person, it immediately and automatically cancels the income tax election, and the corporation must account for its income and losses from that point forward as a regular corporation. Another top tip for creating an S corporation is to set up a shareholder purchase agreement that requires an owner to sell shares back to the company if he wants to exit the business to protect the company’s tax status against ineligible transfers.
Asset Smart.
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