How to Form an S Corp
S corporations are considered "pass-through" entities for federal tax purposes, meaning that they pay no federal corporate income taxes (except for passive income). Nevertheless, shareholders are taxed at the individual level for the income of the corporation. In order to form an S corporation, you must first form a traditional corporation, and then petition the IRS for tax treatment under Subchapter S of the Internal Revenue Code.
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Instructions
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Form a corporation. This will involve choosing an available corporate name, naming shareholders, appointing directors, filing Articles of Incorporation with the Secretary of State of the state in which you want to incorporate, and paying a filing fee.
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Assess your corporation's eligibility for S corporation status. An S corporation may not have more than 100 shareholders, it may not have corporate shareholders, and and all shareholders must be U.S. residents. Check IRS rules for other requirements (see Resource section).
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Determine the tax year in which you would like S corporation status to become effective. If you elect S corporation status for the current tax year, you must either make the election before March 15 or comply with certain additional formalities.
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Obtain the unanimous consent of all corporate shareholders for the election of S corporation status. This consent must include any shareholders who held shares at any time during the tax year in which S corporation status becomes effective, even if they no longer hold shares.
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Complete IRS Form 2553 (see Resource section). Form 2553 is a simple, three-page document that requires basic information about your corporation and each shareholder in order to confirm compliance with IRS rules.
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Secure the signatures of all shareholders on Form 2553, and have the corporation's legal representative sign it. Submit it to the IRS service center listed in the Form 2553 Instructions.
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Tips & Warnings
S corporations must file Form 1120S with the IRS each tax year, even if no taxes are owed.
S corporation shareholders are taxed at an individual level on all of their proportionate share of corporate income, regardless of whether the corporation actually distributes dividends or not.
References
Resources
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