An S Corp is the entity selected by business owners who want the structure of a corporation and the "pass through" taxation allowed for LLCs and Partnerships. S Corps are more complicated and expensive to set up than LLCs and Partnerships.
Question: How is an S Corp formed?
(1) The business must be registered with the Arkansas Secretary of State.
(2) The business must file with the Internal Revenue Service an Election for Small Business Form (2553) and apply for a Federal Identification Number (SS-4). (1-800-829-3676).
(3) The business must file with the State of Arkansas an Election by Small Business Form (AR1103). (501) 682-4775.
All shareholders of the corporation must consent to such an election. The Arkansas election form is AR1103, and is to be obtained from and submitted to Corporation Income Tax Section, P.O. Box 919, Little Rock, AR 72203-0919.
Question: What are the Arkansas State Requirements of an S Corp?
State of Arkansas Requirements:
To qualify for S. Corp status in Arkansas, the corporation must meet the following requirements:
(1) Be corporations in the view of the state and comply with state corporation laws;
(2) Have only one class of stock;
(3) Made up of shareholders that are individuals, estates, or trusts, but not corporations;
(4) Cannot be members of affiliated groups of corporations;
(5) Are limited to 75 shareholders;
(6) Shareholders are United States citizens or residents;
(7) Created by filing Articles of Incorporation with the Arkansas Secretary of State and then the Internal Revenue Service; and
(8) File annual franchise tax reports with the Arkansas Secretary of State.
Question: What are the Federal Requirements of an S Corp?
To qualify for S Corp status, the corporation must meet the following requirements:
(1) Be a domestic corporation;
(2)(a) Have only allowable shareholders,
(b) including individuals, certain trust, and estates and
(c) may not include partnerships, corporations or non-resident alien shareholders;
(3) Have no more than 100 shareholders;
(4) Have one class of stock; and
(5) Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
(6) In order to become an S Corp, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders
Question: Who owns and manages it?
An S Corp is required to have scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
The S Corp is owned by its shareholders. Elected officers and its board of directors manage the corporation.
Question: What are the liability implications?
S Corp shareholders are generally liable only up to the amount that they have invested in the corporation. Exceptions to this limited liability include: personally guaranteeing a loan or line of credit, unpaid taxes, or if the business is not being operated as a corporation.
Question: What are the tax consequences?
An S Corp is a corporation that elects to pass corporate income, losses, deductions and credit through to shareholders for federal tax purposes. Shareholders of an S Corp report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows the S Corp to avoid double taxation on the corporate income. An S Corp is still responsible for tax on certain built-in gains and passive income.
While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a "distribution," which is taxed at a lower rate. Take note: the wages received by the S Corp shareholder must be "reasonable." If they are too low (and distributions too high), this could flag an IRS audit that may result in distributions being reclassified as wages.
Question: What if I need help with choosing or setting up my business entity?
If you need help with choosing an entity type for your new business, drafting or filing Articles of Incorporation or Articles of Organization, or other legal documents necessary for your new business, please contact Deborah Hardin at The Hardin Law Firm, PLC or a licensed attorney in your state.
We serve Little Rock, North Little Rock, Sherwood, Jacksonville, Cabot and surrounding areas in Central Arkansas.
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