S-corp

If you are looking to start your own business, opening an S Corporation  (“S corp”) can be a great option. S Corps tend to be small and to have a small number of owners. In fact, 70% of S Corps have only one owner. This is an anomaly because most people intuitively picture corporations with more than one owner. 

Creating an S Corp may be the best way to avoid the usual double taxation of a regular C corporation’s profits. Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income of a corporation is taxed at both the corporate level and when shareholders pay taxes on dividends.  Most dividend-paying corporations are double taxed on their profits. An S Corp, however,  is a special category of  “regular” C corporations (“C corp”) recognized by the Internal Revenue Services as eligible for pass-through taxation like partnerships.  .

 Stages of Opening an S Corp in Pennsylvania

There are a number of steps to consider when you establish an s corp in Pennsylvania. These are the major steps on how to open an S Corp:

Step 1:  Pick a Name for your S Corp

In Pennsylvania, you must conduct a business search to make sure that the name you have chosen for your S Corp is not already taken. If you decide to use a name for your S Corp other than the name stated on the formation documents or if  you will be operating your S Corp under a name that is different from your own name, you will need to file a Registration of Fictitious Name form (DSCB:54-311) in Pennsylvania. In accordance with Pa. law, anytime a name does not readily identify the actual owners of the business, it should be registered as a fictitious name. Any entity which conducts a business in Pennsylvania under an assumed name or fictitious name must also register the fictitious name by filing a Form (DSCB:54-311).

Step 2: Select a Registered Agent

In Pennsylvania, every S Corp must appoint a registered agent to accept service of process (e.g. , the filing of a suit or a subpoena) and all other paperwork from the Secretary of State in Pennsylvania. If the S Corp operates in multiple states, it must appoint a registered agent in every state in which it operates in compliance with Pennsylvania law. 

Any individual can become a registered agent in Pennsylvania, if s/he is:

  1. over the age of 18
  2. has a Pennsylvania address
  3. has his/her name listed on the S Corp formation documents.

Step: 3. File Formation Documents

The S Corp is not a business entity created by state law, like an LLC or C corporation.  Instead, it is an elected tax status.. Therefore, you cannot create an S Corp as you would an LLC or C Corporation through the formation documents. You first have to make the appropriate state filings with the Pennsylvania Secretary of State to an existing C corp or LLC , then elect to have that entity taxed as an S Corp. In other words, an S Corp can be formed from either an LLC or C Corporation. In order to form an LLC or C Corporation, you must file either a Certificate of Organization if the business is an LLC or Articles of Organization if the business is a C Corp. If you already have an existing LLC or C Corporation, just follow steps 4 and 5 to elect S Corp status for your existing LLC or C Corporation.  Step 4: File Form 2553, “Election by a Small Business”

Pursuant to §1361 of the Internal Revenue Code, S Corps must elect to be treated as such by filing Form 2553 with the IRS. This election must be made within the first 45 days of the formation of the small business S Corp, in order to elect S Corp status for the current year. If the election is not made within this time period (45 days from formation date), then the small business S Corp must wait until the next tax year to use the S status. 

Step 5: Check Applicable State Law

If you decide to open an S Corp in Pennsylvania,  there is usually no need to file for a separate election for the state. Pennsylvania has no distinction between S Corps at the federal and state levels (if you are an S Corp with the federal government you are automatically one with the state). There usually is no need to file for an election with the state. However, some states like Arkansas, New York, and New Jersey do require those operating as S Corps to actively file an election with the state.

Also, in accordance with IRS Notice 2020-75, state and local income taxes imposed on S Corps are allowed as a deduction by the S Corporation in computing its taxable income. This provides a benefit to S Corporation shareholders in states that impose  tax on the entity’s taxable income. 

What documents do you need to file an election

You will need your Certificate of Organization or Certificate of Incorporation, A copy of your Employer Identification Number (EIN) from the IRS, and a Form 2553. You will have to obtain a corp registration for your S Corp through the state tax department of PA when creating an S Corp. In addition, a copy of your prior year’s income tax return should help your lawyer determine the better entity structure for you, whether it be an S corporation or an LLC taxed as an S Corporation.

How an S Corp Lawyer can Help

Are you planning to use an S Corporation this tax season?  Don’t be caught by surprise. S Corps provide the benefits of limited liability and partnership taxation to business owners. 

Follow instructions closely and get legal assistance from attorneys you can trust. Trust a lawyer that’s had many years of experience as a tax attorney. If you are a small business owner looking for a potentially profitable way to build your company, an S Corp can help. The S Corp benefits of liability and taxation can be great when it comes to running a small business. Talk to an attorney who will learn and understand your business. We are professionals who can provide you with the legal help you need and access to affordable attorneys you can trust. 

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