How to Start a Corporation: Your Step-by-Step Guide to Success

Starting your own business is an exciting time in life. For many people, turning ideas into something real can feel like a dream come true. But sometimes, figuring out the best way to set up your business can get complicated.

There are different ways to form your business, and each has its own tax rules. It can be hard to know which choice is right for you.

Many new business owners explore the option of an S-corporation. S-corps offer great flexibility and special tax benefits that could help your business grow.

Let’s get started

What Is an S-Corporation?
So, what exactly is an S-corporation? The name makes it sound like a type of business, but it’s actually a tax status. The IRS, the government agency in charge of taxes, can give your business this special status.

Here’s the important part: with an S-corporation, your business doesn’t pay its own income taxes. Instead, any money your business makes (or loses) gets “passed through” and reported on the owners' personal tax returns. This “pass-through” taxation is a big deal. It means you get to avoid “double taxation,” which many businesses face.

Let me explain how this works. Let’s say your S-corp makes $50,000 in a year. As an owner, you would include your share of that $50,000 on your tax return. Then, you pay individual income tax on that amount, and your business isn’t taxed separately.

This special tax status is meant to help small businesses. Since your business isn’t taxed separately, sometimes it can save you money. But remember, everyone’s situation is different. There are more rules and advantages to learn about S-corps before you decide if it’s right for you.

What Is the Difference Between S-Corps, C-Corps, and LLCs?
When you’re picking a business structure, remember this: an S-corporation isn’t a type of business. It’s a tax status you choose after you’ve already created your business. Let’s break that down.

There are a few main ways to set up your business. Two of the most common are a corporation and an LLC (which means limited liability company). Each one has its own pros and cons.

Corporations
These are usually bigger companies with a board of directors and shareholders (people who own parts of the company through stocks). Corporations have more formal rules and agreements about how they operate.

LLCs
These are popular with smaller businesses because they’re easier to start and run. LLCs are flexible in who owns them and how profits are shared.

If you already have a corporation or an LLC, you can ask the IRS to treat your business as an S-corp. This means your LLC or corporation keeps its structure, but you change how your business is taxed.

Is S-Corp Status Right for You?
Choosing S-corp status is a big decision. There are both advantages and disadvantages, and you need to think about how these will affect your business before making the switch.

Advantages
Some of the main benefits of an S-corp are:

• Avoiding Double Taxation: Most corporations pay taxes on profits, and then owners pay taxes again when they get paid. With an S-corp, you skip that first round of business taxes.

• Potential Tax Savings: As an S-corp owner, you can be an employee of your company. You pay yourself a salary (which your business can count as an expense). Any extra profits aren’t taxed the same way as regular pay.

• Flexibility: S-corps can help as your business grows. You get pass-through taxation and the structure of a corporation, which is useful if you want investors later.

Disadvantages
But S-corps have some downsides, too:

• More Paperwork: S-corps have stricter rules and more forms to file than some other business types. This means more time and possibly higher costs for things like accounting.

• Limited Ownership: S-corps can’t have too many owners, and there are special rules about who can own them. This might make it harder to raise money from outside investors.

Choosing an S-corp isn’t always the best fit. It works well when the tax savings are bigger than the extra work and limits. That depends on how your business is set up and how much you earn.

It’s always smart to talk to a tax advisor or accountant before you decide. They can help you figure out the best choice for your situation.

How To Elect an S-Corp as an LLC

LLCs are a great starting point for small businesses wanting to become S-corps. They offer flexibility to run your business while protecting your personal assets from debts.

By default, LLC owners pay taxes as self-employed individuals. This means paying “self-employment taxes” on all profits. But switching your LLC to an S-corp opens new tax-saving opportunities.

Here’s how it works: As an S-corp owner, you become an employee of your business. You pay yourself a fair salary taxed as regular income.

Leftover profits can be paid as distributions, which aren’t subject to self-employment taxes. Less self-employment tax means more money stays in your pocket.

How To Elect an S-Corp as a Corporation

For some businesses, starting as a corporation and switching to S-corp status later works best. Corporations suit those planning to have many shareholders or attract investors.

The biggest tax benefit of switching to an S-corp is avoiding “double taxation.” C-corporations pay taxes on profits, and shareholders pay taxes again on dividends. S-corps skip the first tax layer.

But S-corps have ownership limits. They can’t have over 100 shareholders, who must meet specific eligibility rules. This may complicate fundraising for growth.

Whether starting as an LLC or corporation, the S-corp election process is similar.

How To Elect S-Corp Status
Ready to switch? Follow these steps:

Step 1: Form Your LLC or Corporation
If not already set up, file paperwork with your state’s Secretary of State. Choose a business name and appoint a registered agent.

Step 2: Obtain a Federal Tax ID Number (EIN)
Get an EIN (like a Social Security Number for your business) for free from the IRS.

Step 3: Ensure Eligibility
Verify your business meets IRS requirements: no more than 100 individual shareholders, among other rules.

Step 4: File Form 2553
Submit this form to the IRS with business details and shareholder signatures. Note strict deadlines based on your fiscal year.

Step 5: Maintain Compliance
Keep your S-corp status by paying yourself a fair salary, filing required tax forms, and holding shareholder meetings.

What Are Some Key Business Formation Terms?

Starting a business comes with a whole new vocabulary. If you’re feeling overwhelmed by all the legal terms, don’t worry. Here’s a breakdown of some of the most common ones you’ll hear:

• Business Entity: This is the legal structure of your business. Common options include sole proprietorship, LLC, and corporation. Each type has different rules about ownership, taxes, and liability protection.

• Articles of Incorporation/Organization: These are the official documents you file with your state to form a corporation or LLC. They include important information like your corporate name, registered agent, and purpose.

• Certificate of Incorporation/Formation: This is the document your state issues once they approve your articles of incorporation. It officially marks the start of your business.

• Bylaws: This document outlines the internal rules and procedures for running your corporation. Think of it as your company’s operating manual.

• DBA (Doing Business As): This lets you operate your business under a name different from your official legal name.

• Legal Entity: This just means a business exists as a separate “person” under the law. It has its own rights and responsibilities.

• Filing Fee: Most states charge a fee to file your formation documents.

• Registered Agent: This is a person or company that receives official legal documents and notices on behalf of your business.

• Business License: Some cities and states require businesses to have specific licenses to operate.

• Employer Identification Number (EIN): This is your business’s tax ID number, issued by the IRS.

There are a lot of important steps to starting a business. Along with choosing a business structure, you’ll also need things like:

• Business Plan: A roadmap for how your business will operate and make money.

• Business Bank Account: To keep your personal and business finances separate.

• Legal Advice: An attorney can help you with complex decisions.

Don’t forget about online resources like the Small Business Administration (SBA) website. You can also check your state’s Secretary of State website for local information and requirements.

Are You Ready To Start Your S Corp?

Ready to take your business to the next level? At House of Founders, we’re all about providing entrepreneurs with the tools and knowledge they need to succeed.

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