How to start an S corp in 2024

Choosing the right structure is an important part of running a successful business. If you’re a small business owner, you may have started as a sole proprietor or single-member LLC. But, as your business grows, it may make sense to change its structure to an S corp. If you start your business as an LLC, you can later convert it to an S corp to take advantage of the S corp’s tax advantages.

Establishing an S corp can provide many benefits, mostly related to tax savings and raising capital. However, before you set up an S corp, you must meet all state and IRS requirements and ensure this structure makes sense for your business.

S corp requirements

An S corporation, or S corp, is a U.S. business entity offering limited liability and pass-through taxation benefits. Its name comes from Subchapter S of the Internal Revenue Code, which sets the rules surrounding the treatment of taxes. Businesses typically organize as S corps to enjoy tax advantages and raise capital.

The IRS outlines the requirements you must meet to form an S corp. You must: 

• Be a domestic corporation: Your business must be based in the United States.
• Have only allowable shareholders: These might include individuals, estates and certain trusts. Shareholders cannot be corporations, partnerships or non-resident aliens.
• Have no more than 100 shareholders: Married couples are treated as one person.
• Have only one class of stock: All shares must offer the same rights to profit-sharing.
• Not be an ineligible corporation: Certain types of businesses are not eligible to become S corporations. These include insurance companies, some sales companies and certain financial institutions. Also, keep in mind that corporations, partnerships and certain types of trusts cannot own S corps.

Note: These are only the federal requirements. State and local requirements may also apply and often vary.

How to set up an S corp in 12 steps

You must take several steps to set up an S corp. While we lay out the steps below, it’s best to contact a business advisor, attorney or accountant to ensure you meet the requirements in your state and your specific circumstances.

Here are 12 steps for creating an S corp:

1. Decide the nature of your business

Some businesses, like insurance companies and certain financial institutions, are not eligible to become S corps. Depending on the state, some require different business structure elections, such as medical doctors or accountants. In addition, if you have more than 100 shareholders, an S corp is not a suitable option. So, your first step is ensuring your business qualifies to be an S corp. 

2. Choose your business name

Pick a unique business name that complies with state regulations. Often, this means your name can’t be too similar to existing names. In addition, some states have restricted words that you may not include in your business name. For example, if your business is not a bank, you often cannot use the word “bank” in your name. 

You can find whether a business name is available on your state’s division of corporations or corporation commission website. Begin with a Google search of “S corp name search” plus your state name. Many such searches will bring up a search tool you can use from your state’s government website to determine if your chosen name is available. 

Most states also require you to complete a name reservation form and pay the applicable fees to reserve your business name, often on your state’s corporate commission or secretary of state website. To reserve a name, search “business name reservation” and your state name. Reservation fees often apply and range from $5 to $50. 

3. Choose a registered agent. 

S corps must have a registered agent. A registered agent is a person or organization that is available during all local business hours throughout the year to receive legal documents and notices on your business’s behalf. You can designate a person or a business to be your registered agent. Either way, they must fulfill the following requirements: 

• Be 18 years of age or older.
• Have a physical address in the state in which you do business. 
• Be available at the business address during all regular business hours throughout the year without leaving for business travel, paid time off or even lunch with a client. 
• Be able and willing to forward all received documents to a responsible party within your S corporation who can address them in a timely manner. 

If you wish to hire a registered agent, read our best registered agent service guide. 

4. File articles of incorporation

You must file articles of incorporation with your Secretary of State’s office or a similar information state agency. This form marks the official formation of your S corp and requires you to provide key information about your business to your state. 

You can find this form by searching “S corp articles of incorporation” and your state name online. All states have different filing fees ranging from $25 to $315. For example, in Virginia, the filing fee is $25. To fill out the form, you must have on hand information like the name of your corporation, its registered agent, the business’s address and the number of shares it will issue.

5. Create corporate bylaws

Corporate bylaws are an internal document that explains your business’s operating rules. It might cover topics like your business officers’ roles and duties, how and when the board will meet and how the business will handle administrative tasks. 

Corporate bylaws are essential to your business operations, establishing a firm foundation for business decision-making processes. In addition, these documents help you maintain your limited liability in case you’re ever taken to court. 

Note: Corporate bylaws are required by law in some states, while others don’t explicitly require them. Even if your state requires you to create bylaws, none require you to file them, so there is no filing fee.

For help creating your corporate bylaws, some business formation companies offer templates for free, such as Rocket Lawyer and Northwest Registered Agent. Since this is a legally binding document, having a business lawyer look over the bylaws before your board formally adopts them is a good idea. 

After creating your corporate bylaws, there may be follow-up steps, including adoption by the board of directors and disclosing them to shareholders.

6. Appoint board directors

Your corporation needs a board of directors with members that will make major decisions and generally oversee the company’s operations. To select board members, you should identify candidates with the skills, experience and expertise you need for your organization. While most states do not impose strict requirements around who can be a board member, some states set restrictions, such as not allowing minors to be board members.

To find candidates to serve on their boards, some companies post their search for board members on job sites like LinkedIn, accompanied by a list of desired skills, while others select potential board members through their professional networks. Typically, shareholders elect the initial board once candidates have been found, which can occur at a shareholder meeting. 

7. Hold the first board of directors meeting

At your first board meeting, you’ll likely take care of adopting bylaws and electing corporate officers, voting on emergent issues, deciding on the general direction of the company and a performance review of the company. State laws vary, but states generally require S corps to hold shareholder meetings regularly and record meeting minutes.

Meeting minutes should include the date and location of your meeting, the names of directors who did and did not attend the meeting, what was discussed in the meeting and the results of any votes or elections made throughout the meeting. Many sources offer free meeting minutes templates, such as Rocket Lawyer. 

8. Obtain an employer identification number (EIN)

You must obtain an employer identification number (EIN) for your corporation from the IRS. You can do this online at IRS.gov for free, by mail or by fax. To apply, you must provide the name and Social Security number of the responsible party applying for the EIN. This person must control or manage the business and its funds and assets. 

Once you submit your application online, you will immediately receive an EIN confirmation notice with your number. Download, print and keep this document in your business records. It should be referred to when completing tasks like opening a business bank account or filing taxes.

9. Issue stock

Issue stock to the owners of the business. Generally, you can do this by drawing up a document such as a bill of sale or stock certificate. This document determines the price per share and the number of shares. Then, a director or officer can approve the sale by signing a document. Many business formation services, such as Northwest Registered Agent, offer stock bill of sale templates to guide you in this step. Typically, this document includes: 

• The shareholder’s name. 
• The number of shares being sold. 
• The price per share. 
• The total value of the shares sold. 
• Assets and the value of assets being used to purchase shares. 
• A director or officer’s name and signature. 
• A witness’s signature (if the director or officer is also purchasing shares). 
• The date.  

Remember, you can offer only one class of stock, and you must limit the number of shareholders to 100. In addition, various fees may be involved, including fees paid to underwriters, attorneys and accountants.

10. File IRS form 2553 

Once you’ve sold shares, to finalize your S corp formation, you must file Form 2253, “Election by a Small Business Corporation,” with the IRS. To complete the form, you will need information such as the S corp’s name, address and date of incorporation. You’ll also need information on each shareholder, including their names and address, signatures and their number of shares or percentage of ownership.

Generally, you can file this form by mail (no photocopies are allowed) or fax it to a regional IRS center. Depending on your state, there are two service centers for sending the form. Check the first page of the form to see a current address of where to submit it based on your state. There are no fees to file Form 2253.

11. Regularly file annual reports

To maintain your S corp status, you must also regularly file annual reports. These reports are used to update or confirm the accuracy of current company information with the state, such as who your current directors are, who your registered agent is and how many shares are authorized for sale.

Most states charge a fee to file an annual report ranging from free to $325. For example, filing an annual report in Virginia is free, while it costs $8.75 to file in Florida. In addition, each state has its own form and due date, which you can find on your Secretary of State or division of corporation’s website. 

12. Comply with tax and other regulatory requirements

You’ve already completed many steps to stay compliant, including keeping business records (like your EIN confirmation notice and meeting minutes), creating corporate bylaws, meeting with your directors and shareholders, issuing stock and recording the sale of stock. 

However, you need to also comply with ongoing requirements, such as yearly tax and regulatory requirements. Other ongoing compliance tasks include paying franchise or sales tax to the state, filing an annual report or biennial statement, and applying for and maintaining business licenses and permits.

Many states offer a list of potential business permits or licenses you need based on your county and industry. You must visit your state website to determine all your state requirements and for directions on how to fulfill them. 

The Small Business Administration (SBA) also offers guidance in these areas, as well as a help finding a local business counselor. Business formation and registered agent service providers like ZenBusiness and LegalZoom can also assist with this step.

S corp vs. C corp vs. LLC: which to choose 

An S corp, C corp or LLC can be the right choice for your business, depending on the situation. Here are a few scenarios in which each may be a better choice: 

• S corp: Due to its favorable tax treatment and ability to raise capital quickly (through stock issuances), an S corp may be a good choice for a growing business. However, corporations require stricter record-keeping and operational processes, so they aren’t suitable for all businesses.
  S corps can also be beneficial when selling assets. C corps must pay tax on profits of a sale of assets, and the owners must pay taxes again when taking money out of the business. This isn’t necessary for S corps due to their pass-through taxation rules.

• LLC: An LLC generally is ideal for a business with one or just a few employees, as they’re usually the easiest business structure to manage.

• C corp: Large businesses might prefer a C corp election thanks to this structure’s lack of ownership restrictions. While S corps are limited to 100 shareholders, C corps have no limit on shareholders or how many classes of stock they can issue.

S corp vs. PC (professional corporation)

S corps and professional corporations (PCs) are similar in many ways, but they tend to play different roles in the business world. Because PCs are geared toward certain professional groups, they come with unique features. 

A professional corporation is a corporation made up exclusively of licensed professionals. While many types of businesses can incorporate as an S corp, PCs typically are owned by professionals like doctors, lawyers, accountants, engineers, veterinarians and architects. Depending on the state, some professional firms are even required to choose this business structure, including accountants, medical doctors and attorneys. 

A PC must be made up of professionals within one profession and, while they generally protect shareholders’ personal assets, shareholders can be held legally responsible for negligence or malpractice. However, many licensed professionals opt for a PC structure anyway because they cannot be held accountable for other professionals’ malpractice or negligence, even within the same company.

S corp’s, on the other hand, are generally started by companies wanting to expand quickly by raising capital through the issuance of stocks or shares. Its board of directors or shareholders are often made up of diverse professionals with the mix of skills needed to run the business successfully. Lending to quick capital gain through share sales, they can have up to 100 owners or shareholders. 

S corp pros and cons: Important considerations

Pros:

• Adheres to pass-through taxation rules. 
• Allows owners to save on self-employment taxes.
• Provides liability protection for owners’ personal assets. 

Cons:

• Ownership restrictions. 
• Owners must pay themselves a reasonable salary. 
• More complicated to maintain than an LLC. 

Starting an S corp can supply many benefits, but whether it’s the right business choice depends on the circumstances. The nature of your business, tax preferences and desire to raise capital can all contribute to your decision about forming an S corp.

Tax considerations

Tax considerations must be taken into account. For example, consider the following:

• The S corp structure offers pass-through taxation, which avoids the double taxation faced by C corps.
• An S corp could be worse from a tax standpoint than LLCs due to how individuals are taxed. For example, the amount left over after paying owners’ salaries is not subject to payroll tax. However, if the extra amount is too large, the IRS may classify its use by shareholders as an excessive distribution. This can result in back taxes and penalties.

Administrative complexity

Although maintaining an S corp is less complex than maintaining a C corp, it still requires a lot of paperwork. S corps must file an annual tax return (Form 1120S) and additional state filings and fees may be required, such as annual reports. In addition, S corps may be required to hold regular shareholder meetings and record meeting minutes, depending on state laws.

Ownership restrictions

S corps are subject to several ownership restrictions, such as a limit of 100 shareholders and the issuance of only one class of stock. In addition, all shareholders must be U.S. citizens or resident aliens. This can make S corps limiting for companies that expect to have large numbers of shareholders and issue several classes of stock.

Raising capital

Consider whether you expect to raise capital for your business. Corporations, partnerships and certain types of trusts cannot own S corps. This may limit your ability to raise capital, meaning a C-corp structure could be better for your business. 

Can you form an S corp by yourself?

Yes, you can set up an S corp and serve as the only employee and board member. However, you are still required to conduct annual board meetings and keep minutes, even if you’re the sole attendee.

You can file the proper S corp paperwork on your own, too. However, due to the complexities involved, we recommend you consult a tax professional or attorney when setting up an S corp.

S corporation form 2553 filing deadline

Form 2553 should be filed by two months and 15 days after the start of the year you want the S corp election to take effect. For example, most corporate tax years start on January 1 and so the filing due date is March 15 of the same year. If the tax year starts on June 1, you must file the form by August 15. If the form is filed late, it generally takes effect the next tax year.

Frequently asked questions (FAQs)

Can I change from an LLC to an S corp?

Yes. In fact, a good way to form an S corp is to start an LLC, then convert it to an S corp. LLCs are typically easier to manage since they don’t have to hold shareholder meetings and record meeting minutes, unlike corporations. However, converting your LLC to an S corp can be beneficial for its tax benefits and for the ability to raise capital through the issuance of shares. Keep in mind that you must meet S corp eligibility requirements, such as having 100 or fewer shareholders.

How long does it take to start an S corp?

How long it takes to start an S corp depends on several factors, including the complexity of your business, your state’s processing time and whether you choose to speed up the process. The process might take anywhere from a few weeks to a few months. If the latter is too long, consider hiring a business formation service, which should be able to accelerate the timetable.

Can I change from an S corp to a different business entity?

Yes, changing from an S corp to a different business entity is possible. However, the process can be complex, depending on the nature of your business and the desired business entity. The three most common transitions are switching from an S corp to a C corp, an LLC or a partnership. Before making the move, consult a business attorney or tax advisor.