An S Corporation, also known as an S Corp, is a type of business structure that provides limited liability protection for its shareholders while also allowing for pass-through taxation. This means that the corporation’s profits and losses are passed through to its shareholders, who report them on their individual tax returns. If you are considering setting up an S Corporation, here are the steps you need to follow:
Step 1: Choose a Name for Your Corporation
Before you can start setting up your S Corporation, you need to choose a name for it. The name should be unique and not already in use by another business in your state. You can check the availability of your chosen name by searching your state’s business entity database. Once you have confirmed that your chosen name is available, you can register it with your state’s secretary of state. Most of my clients register their companies in California. The California Secretary of State provides an online tool for registering the corporation’s name.
Step 2: Choose a Registered Agent
Every S Corporation is required to have a registered agent. This is a person or entity that is responsible for receiving legal and other official documents on behalf of the corporation. The registered agent must have a physical address in the state where the corporation is registered. You can choose to act as your own registered agent, or you can hire a professional registered agent service.
Step 3: File Articles of Incorporation
The next step is to file Articles of Incorporation with the secretary of state. Most of my clients register their companies in California, although a few register in Delaware or other states. This document includes basic information about your corporation, such as its name, address, registered agent, and the names and addresses of its directors and officers. You will also need to specify the number and type of shares that will be issued by the corporation. This document must be filed along with a filing fee, which varies by state.
Step 4: Draft Corporate Bylaws
Corporate bylaws are the internal rules and procedures that govern the operation of your corporation. They establish how the corporation will be run, how decisions will be made, and what the roles and responsibilities of the directors and officers will be. Bylaws are not filed with the state, but they are an important document that should be drafted before the corporation begins operations.
Step 5: Initial Board of Directors Meeting
After you have completed the above steps, you should hold your first board of directors meeting. This meeting is where the directors will appoint officers, adopt bylaws, issue stock, and make any other necessary decisions. You should keep minutes of this meeting and all subsequent meetings.
Step 6: Issue Stock Certificates
Once your corporation is officially registered, you can issue shares to your shareholders in exchange for the cash or other assets they contribute. The stock certificates you issue will represent ownership in the corporation and should be kept in a safe place. You should also maintain a stock ledger, which is a record of all stock issuances and transfers. Remember: an S-corporation cannot have more than 100 shareholders, and generally, all of the shareholders must be individuals who are U.S. citizens or permanent residents.
Step 7: File Any Required Securities Exemption Notices
The shares of stock you issue are “securities” for purposes of the state and federal laws designed to protect investors. Failure to understand and follow these laws can lead to severe civil liability and criminal penalties. There are some useful exemptions which are designed to allow small companies to issue shares to a limited number of initial investors. It is vital to understand and comply with the exemption you plan to rely upon, including filing any necessary notice filings with state and federal regulators.
Step 8: Register for State & Local Taxes and Licenses
Depending on the nature of your business, you may need to obtain various business licenses and permits before you can begin operations. In California, most businesses are required to obtain a business license from the cities in which the operate. California also requires retailers to obtain a seller’s permit and to collect and pay sales taxes. In California, certain professional corporations, such as corporations in the fields of medicine, dentistry, law, or construction, have additional requirements. These requirements vary by state and industry, so it’s important to research the requirements for your specific business.
Step 9: Obtain an Employer Identification Number (EIN)
An Employer Identification Number, or EIN, is a unique nine-digit number that is assigned to your corporation by the IRS. This number is used to identify your corporation for tax purposes and is required if you plan to hire employees or open a bank account for your business. You can apply for an EIN online through the IRS website.
Step 10: Elect S Corporation Status
To become an S Corporation, you must elect S Corporation status by filing Form 2553 with the IRS. This form must be filed no later than two months and 15 days after the beginning of the tax year in which the election is to take effect, or at any time during the preceding tax year. This form must be signed by all shareholders and must include the corporation’s EIN.
Step 11: Open a Bank Account
Once your corporation has an EIN, it can open a bank account. This is a critical step. All of the corporation’s funds, such as the capital contributions paid by shareholders for their shares and any income from business activities, should be deposited in the corporation’s bank account. Similarly, the corporation’s expenses, such as rent, payroll, utilities, etc., must be paid out of the corporation’s bank account. The corporation will not protect its owners unless it operates as a separate “person” with its own bank account under the corporation’s name and EIN. So, be sure not to “commingle” the corporation’s money in anyone’s personal bank account.
Step 12: Get Insured
Maintaining adequate insurance is critical to the success of every business. Most companies need commercial general liability insurance coverage, such as workers’ compensation, auto, or professional liability. Depending on the nature of the business, the company may also need other types of coverage. It is almost always a good idea to talk with your insurance agent about the corporation’s insurance coverage.
Setting up an S Corporation can seem like a daunting process, but by following these steps, you can ensure that your corporation is set up properly and ready to start operating. It’s important to consult with an attorney or accountant who can provide guidance on the specific requirements and regulations that may apply to your corporation.
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