INCORPORATION BASICS: What Is an S-Corp and How Do You Form It?
Written by: Mazurkraemer Law Clerk Jahnvi Patel - Villanova School of Law, Class of 2024
An S corporation is a tax designation for which an LLC or a corporation can apply which elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. S corporation shareholders report any flow-through of income and losses on their personal tax returns and are assessed tax.
The overall benefit for the owners of S corporations is that they are considered employees of the business entity and thus are exempt from paying self-employment taxes. For example, as the owner of the S Corp, you can pay yourself a “reasonable” salary” on which you are taxed through payroll; additional draws are taxed as ownership distributions.
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The requirements for an S Corporation are:
Be a domestic corporation.
Have only allowable shareholders.
May be individuals, certain trusts, estates and
May not be partnerships, corporations, or non-resident alien shareholders.
Have no more than 100 shareholders.
Have only one class of stock.
Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Once a small business fulfills the requirements for an S Corporation, the process to become an S Corporation in Pennsylvania is as follows:
Prepare a PA docketing statement.
A supplemental form that is most often filed when creating a new business entity (such as an LLC or corporation) in Pennsylvania. The PA Docketing Statement is like a cover sheet that should be included in your submission package when you file with the PA Department of State.
To create a valid corporation, a small business must file an article of incorporation with the secretary of state and pay the filing fee.
This includes the name of the corporation, which should also include either the full word or abbreviation of “limited,” “company,” “incorporated,” or “corporation.”
The number of shares of stock that the corporation can issue, the corporation can have no more than 100 stockholders. Only individuals can hold stock, and the corporation can only issue one class of stock.
Include the addresses and names of the incorporators, the registered agent, and the address of the registered office
Include the address of the major office as well, if it's different from the registered office.
Apply for an employer identification number (EIN) through the Internal Revenue Systems (IRS) website.
Prepare the Initial board resolution to authorize the President of the business to open a bank account to do small business transactional matters and fill out a corporate formation document with the bank.
Fill out Form 2553 with the IRS and must be signed by all shareholders.
Create bylaws that are adopted by the corporation's directors during the first board meeting.
This can be done through self-help resources or through hiring a lawyer within your state to draft them for you.
Draft a shareholders’ agreement
This is an arrangement among a company's shareholders that describes how the company should be operated and outlines shareholders' rights and obligations, its intention is to make sure that shareholders are treated fairly and that their rights are protected.
Create a form of Stock Certificate.
A physical piece of paper that represents a shareholder's ownership in a company.
File the documents either through mail or fax a copy to the IRS. The IRS will notify you whether or not the IRS accepted your election within 60 days of filing.
An S Corporation is suitable for entrepreneurs who anticipate having several employees and who may or may not want to eventually have multiple shareholders. Consider working with a local business attorney like Mazurkraemer who can advise you through the process.
Sources:
S Corporations
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
What Is an S Corporation? The Beginner’s Guide