How to Set up an S Corporation?

Introduction

Setting up an S corporation is a lot more involved than setting up an LLC. You must follow certain formalities throughout the year and create records for your business as if it were a regular corporation. However, you also have the benefit of being able to use your personal assets in case of liability, unlike other types of corporations (such as C corporations) that are prohibited from doing so.

Create a legal business structure.

The first step to setting up an S corporation is to create a legal business structure. You need to file the appropriate business formation documents, including articles of incorporation and an operating agreement, with your local secretary of state. These documents will establish who owns the company and how it’s operated.

Next, you must pay fees for filing these documents (typically $50-$200) and then file your federal tax forms with the IRS.

File and pay taxes.

For the most part, S corporations don’t have to file an income tax return or pay income taxes. This means that you won’t be paying a regular salary to your shareholders/owners and will instead pay them dividends as profits are made.

As an S corporation owner, you must report all of your earnings (including those from another business) on Schedule C of Form 1040 each year with the IRS. The same goes for any other individual shareholder who receives more than $600 in dividends from you during the tax year. An employer identification number (EIN) is required when applying for an S Corporation status; this can be obtained by filing Form SS-4 online with the IRS.

Appoint directors.

Each corporation must have a board of directors, which is a group of people who make decisions for the company. The shareholders appoint directors to serve on the board and represent their interests. Directors must be at least 18 years old and can be individuals or corporations. Shareholders may also serve as directors.

Directors cannot hold more than two consecutive terms unless they are re-elected by shareholders with a majority vote prior to the expiration of their second term in office.

Create and maintain records.

• You must keep business records for at least five years. These include records of your business’s assets, liabilities, and capital structure; minutes of board meetings; financial statements; tax returns; and other documents relating to your business operations.
• You must keep financial records for at least five years (or longer if you have questions about the accuracy of any part of those records).
• You generally need to keep tax returns, supporting schedules and statements, worksheets, and other IRS forms for three years after filing the return or paying taxes due.

Set up a retirement plan.

• For a 401(k) plan, you can either set it up with a service provider or do it yourself.
• A simplified employee pension (SEP) IRA is another option for small businesses.
• An employee stock ownership plan (ESOP) is a type of retirement plan where employees own part or all of the company they work for and receive shares in their employer’s stock as compensation.
• Profit-sharing plans are another common type of retirement plan that allows employers to contribute money each year into an employee’s account.

Follow fiduciary duties.

Corporations are governed by state law and the laws of the federal government. They also have a set of fiduciary duties that must be followed among corporate directors, officers, and shareholders. These fiduciary duties include:

• A duty to act in good faith
• A duty of care
• A duty of loyalty

After setting up an S corporation, you must follow certain corporate formalities throughout the year

After you set up an S corporation, you must follow certain corporate formalities throughout the year. These formalities include:

• Directors of corporations must conduct board meetings and keep minutes of those meetings. They also must record minutes of any shareholders’ meetings and keep a record of stockholders’ names and addresses.
• Corporate seals are a symbol that identifies your company as an actual business entity that can enter into contracts, sue or be sued, etc. You’ll need to have one if you want to protect yourself from being held personally responsible for obligations taken on by your business (i.e., debts).
• A corporate name is more than just the name under which you do business; it’s also what secures your ownership rights in assets such as real estate purchased for use by the company (such as an office building) or equipment purchased specifically for use in connection with your business activities (such as computers).

Conclusion

If you’ve decided to set up an S corporation, you should be aware of the additional paperwork and fees required by the IRS. In addition, there are limitations on who can own shares of stock in an S corporation. You should also know that if you’re setting up an S corporation as a partnership, it could take several weeks or months before your business is officially recognized by both state and federal governments.