A simple, free, and complete guide to starting an s corporation from scratch.
Disclaimer: The information presented on this website is only a basic introduction to s corporation and partnership taxes. We strongly recommend that you hire a professional to help you. The information provided here does not replace the IRS instructions for filing taxes. Incorrect filings could lead to large tax bills and penalties. Please hire a CPA or an EA to prepare and file your tax returns.
Starting an s corporation step one – form an entity
An s corporation is not actually an entity type. A business that wishes to become an s corporation must first organize an entity with the appropriate state.
Typically, the easiest way to get started, would be to form an LLC or a corporation. On a very basic level, LLCs are good if you do not wish to sell shares or raise capital, and corporations are good if you do plan to do those things. Please seek advice from a business lawyer to do what is best for your situation.
When it comes to forming an entity, you have several choices. These choices often have different prices but they all offer approximately the same value. Here are your options from the cheapest to the most expensive:
- You can do it yourself for just the filing fees. You save a lot of money here but you must figure out how to do it and you do not get any advice.
- You can hire an online service, such as “LegalZoom”. This is a good value but watch out for these companies trying to up-sell you into things that you don’t really need. They are tricky about it and to me that is in bad taste. This can cost form about $150 to $300.
- You can hire a local tax firm to organize your entity. This way you get some decent brick and mortar support and tax advice. Most firms charge from $300 to $800 for this.
- You can hire a business lawyer to do it. The price range for this is $800 to $2000 but you “should” get great legal advice and support. On one hand you should be in good hands when it comes to your financial and legal liability questions, but, no offense to lawyers, but I’ve seen some pretty bad tax advice coming from them on occasion.
Starting an s corporation step two – get an FEIN
Your new entity will need a tax identification number, just like an individual has a social security number. This tax ID is called a “federal employers identification number”. It is also known as just an “EIN”.
This number will be needed to file income taxes, file and pay employment taxes, to open a bank account, and for several other reasons.
Again, there are a few routes to take as far as getting one by yourself or hiring a professional to help you.
Although it’s not that difficult to get one from the IRS website, the application process does ask you a few questions that will have ramifications if answered incorrectly. Because of that, we officially recommend that you hire a professional (contact us here if you would like to hire us for this). If you decide to get one on your own, visit the IRS website here.
Starting an s corporation step three – make the election
File IRS form 2553 to elect s corporation status for your entity.
Again, you have the choice of doing it yourself or hiring professional help. Please feel free to contact us.
You generally have 75 days from forming your entity to make this election, otherwise you might have to wait until the following year to be taxed as an a s corp.
If the entity was formed in a prior year, you must make the election (generally) by the 15th of March to be treated as an s corporation for that year. You can’t just wait until the end of the year and decide retroactively that you want to be taxed as an s corp.
Starting an s corporation step four – open a business bank account
A business bank account will be needed to track your bookkeeping. You should deposit all gross sales receipts into this account and pay for all of your expenses through this account as well. You might also open a business credit card account (or more than one) depending on your business needs.
Since most s corporations require that you run payroll, you will be making all of your tax deposits form this account as well. Some s corporations open a separate business bank account for payroll taxes. This helps to ensure that the funds needed to make the deposits are not spent on other operating expenses causing bounced tax payments. This is helpful when you have more than one shareholder or partner who does purchasing for the business.
Either of these accounts can be used to pay out the salaries and the shareholders as well.
Before you head to the bank or apply for business credit cards, be sure to have your articles of organization (from step one) and your FEIN (from step two). Your bank will likely require these items to open the account. Some banks will also ask for state licenses and tax accounts as appropriate.
Starting an s corporation step five – set up and run payroll, as required
If you or other shareholders provide more than minor services for the business, it is likely that running payroll will be a requirement.
Running payroll is complicated, and penalties for non-compliance are pretty rough – so we recommend that you hire someone to manage you payroll for you.
Starting an s corporation step six – obtain appropriate state licensing and registration, as required
Some occupations and business services require licensing by your state. You may also need to register your business with your state as well. Think of these requirements as the things you need to drive a car. You need a license to show that you have demonstrated the required education and skill, and a registration to show that your vehicle is in compliance.
Some states require additional tax accounts and licenses such as for sales and use taxes.
Starting an s corporation step seven – be sure to file your income taxes on time
Typically, an s corporation does not pay any tax. Instead the income and expense activity passes through to the shareholders.
S corporation tax preparation complicated and most business owners should hire a professional to prepare and file the required tax returns.
Missing the deadline on your s corporation tax returns is much more serious than missing the deadline on your personal taxes. The penalties are very large.
Click here for our s corporation start-up checklist (coming soon).