To form an S corporation, register with government resources, choose the right time for tax elections, and make provisions for a buyout. Follow state instructions to file incorporation documents and hold elections within 60 days of filing. Have a shareholder purchase agreement to protect the company’s tax status.
The best tips for forming an S corporation are to use government resources to register, select the right time of year to hold tax elections, and make early provisions for a buyout. An S corporation holds a special federal income tax election with the United States Internal Revenue Service (USR). The method for forming an S corporation is the same as for any corporation, except for the additional step needed to hold elections.
Corporations in the United States are formed under state law. A corporation chooses a state, files its articles of incorporation with the corporate division of the state office secretary, and pays a filing fee. Once the state accepts the filing, the company is considered registered and officially in business. An S corporation starts out like a regular corporation and is formed by filing the standard documents with a state.
All states use the Internet to provide complete instructions and blank filing forms to file incorporation paper documents. Creating an S corporation in any state is a simple matter of following the instructions and completing some basic information on a form that can be downloaded from the state website. The best advice for any new business owner is to visit the website and file the documents yourself, without hiring a third party to handle the process.
An S corporation comes into existence when a regular corporation makes a subchapter S election under the United States Internal Revenue Code with the Internal Revenue Service (IRS). One of the most important features of this election is that it changes how the company is treated for federal income tax purposes. After the election, income and losses are passed on to the owners of the corporation to be listed on their personal tax returns in proportion to their ownership interest, rather than the corporation filing its own tax return. These elections can be made at any time during the existence of the company, but its validity date depends on the month in which the documents are filed. Another suggestion for setting up an S company is to hold elections within 60 days of filing the articles of association in order to make it effective immediately.
The IRS limits the number and type of owners an S corporation can have. This is significantly different from the stock of an ordinary company, which is freely transferable to any person or entity anywhere in the world. If the shares of Corporation S are transferred to an ineligible person, it immediately and automatically voids the IRS tax election, and the corporation must account for its profits and losses thereafter as a regular corporation. Another important tip for forming an S corporation is to have a shareholder purchase agreement in place that requires an owner to sell shares back to the company if they want to exit the company to protect the company’s tax status from ineligible transfers. .
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