To become an S corporation, your corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders. Although generally easier to form than https://investrecords.com/the-importance-of-accurate-bookkeeping-for-law-firms-a-comprehensive-guide/ a corporation, there are some administrative and compliance tasks to be done. To help you form an LLC successfully and in compliance with state law, follow these eight steps.

This is the simplest and most cost-effective way to structure a business.

Comparing LLCs with other entity types

To form an S corp, you must first form a corporation by preparing and filing Articles of Incorporation or a Certificate of Incorporation with the proper state authorities. You must also pay filing fees and any applicable initial franchise taxes or other fees. The type and amount of information required in the incorporation documents varies by state. A registered agent, also known as an agent for law firm bookkeeping service of process, receives important legal notices and tax documents on behalf of an LLC. These include important legal documents, notices, and communications mailed by the Secretary of State (such as annual reports or statements) and tax documents sent by the state’s department of taxation. Other court documents such as garnishment orders and subpoenas are also served on the registered agent.

• An S corporation is a special structure of business ownership by which the business can avoid double taxation because it is not required to pay corporate income tax on the profits of the company.
• We disclaim any duty to update or correct any information contained in this blog post, including errors, even if we are notified about them.
• It is also unnecessary because other business entity options have ownership interest restrictions built into their governing documents (i.e., in a standard limited liability company operating agreement).
• This can be especially beneficial for businesses just starting and looking to save on costs.

You’ll need to write articles of incorporation and corporate bylaws, appoint a board of directors, run shareholder’s meetings, and keep a record of minutes for certain company meetings. A business owner may be able to use her C corporation status to reduce the amount of income tax she pays each year. If she earned $100,000 as a sole proprietor, that entire amount would be subject to personal income tax and self-employment tax. If she earned $100,000 as the owner of a C corporation, however, she could choose to take a $40,000 salary and leave $60,000 in the corporation. In that case, the business owner would only pay personal income tax on the $40,000 salary and corporate tax on the remaining $60,000. Another C corporation tax advantage is the ability to lease assets to your own company.

It’s Easy to Transfer Ownership

The business is then considered partially or completely owned by those people. If the business needs money, another person or group can purchase “additional” stock; however, each existing shareholder will now own less of the company. Whoever sold the stock now has more available cash to expand the company. When a company is private, it’s owned and controlled by one person or a small group of people. The shares are held privately from the remainder of the shareholders/public and their stock prices are not published. In most cases, only those with access to the “inner circle” know what they are selling at.

• You should also consult with an attorney or accountant who can help you make the right decision based on your specific circumstances.
• This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings.
• The good news is you are reading this because you have given serious thought to the legal form of your business.
• Since most corporations sell ownership through publicly traded stock, they can easily raise funds by selling stock.
• A corporation can be owned by individuals and/or other entities, and ownership is easily transferable via the buying and selling of stock.
• Corporations have a completely independent life separate from its shareholders.

Another potential disadvantage of an LLC is that it has a limited life. Unlike corporations, which can exist in perpetuity, LLCs must dissolve when a member dies or leaves the business. This can be a problem for businesses that want to pass on ownership to the next generation.

Advantages of Forming an Out-of-State Corporation for a California Company

Alongside the lengthy application process is the amount of time and energy necessary to properly maintain a corporation and adhere to legal requirements. You have to follow many formalities and heavy regulations to maintain your corporation status. For example, you need to follow your bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create annual reports. There are also restrictions on certain corporation types (for example, S-corps can only have up to 100 shareholders, who must all be U.S. citizens). Although some corporations (C corporations) are subject to double taxation, other corporation structures (S corporations) have tax benefits, depending on how their income is distributed. For example, S corporations have the luxury of splitting their income between the business and shareholders, allowing it to be taxed at different rates.