If you are looking to start your own business, opening an S Corporation (S Corp) can be a great way to spare your profits from excessive taxation. S Corps tend to be small business entities with a small number of owners. (Although most people intuitively picture corporations having several owners, 70% of S Corps, in fact, have a single owner.)
Forming an S Corp is one of the best ways to avoid the usual double taxation of a C Corporation’s profits. Double taxation is a tax term referring to income taxes paid twice on the same income. It occurs when the income of a corporation is taxed at both corporate and shareholder levels, meaning that the corporation’s profits are taxed along with the shareholders’ dividends. Most dividend-paying corporations must pay a double tax on their profits in Pennsylvania. S Corp, however, falls into a special category of C Corporations (C Corp) recognized by the Internal Revenue Service (IRS) as eligible for pass-through taxation.
At Premiere Legal Solutions, we are dedicated to helping entrepreneurs thrive. We offer legal counseling for businesses and individuals to help fix and prevent mistakes at the early stages of company formation. If you want to establish an S Corp that complies with all state regulations, you will need a clear plan of action and a thorough understanding of business laws and regulations applicable to S Corps in PA. We have an in-depth knowledge of Pennsylvania tax and business laws and are happy to offer you comprehensive guidance on S Corp formation in Pennsylvania.
Step One: Pick a Name for your S Corp
Before establishing your company, you must conduct business name research to make sure that the name you want to use for your business is available. 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 different from your own name, you will need to file DSCB:54-311 form, Registration of Fictitious Name. In accordance with PA law, anytime a name does not identify the actual owners of the business, it must be registered as a fictitious name. Any entity that conducts a business in Philadelphia under an assumed or fictitious name must complete the Registration of Fictitious Name form.
Step Two: Select a Registered Agent
Every S Corp must appoint a registered agent to accept service of process (the filings of suits or subpoenas) and all other paperwork from the Philadelphia Secretary of State. If the Pennsylvania S Corp operates in multiple states, it must appoint a registered agent in every state where it operates.
You can choose to act as your own registered agent, or you can hire a professional registered agent service. Any individual can become a registered agent in Pennsylvania if they are over the age of 18, have a Pennsylvania address, and have their name listed on the S Corp formation documents.
Step Three: File Formation Documents
S Corp is not an independent business entity governed by state law, like an LLC or C Corporation; it is an elected tax status. Therefore, you cannot create an S Corporation like you would an LLC or C Corporation through the formation documents.
Instead, to open S Corp, you must make the appropriate state filings with the Philadelphia Secretary of State for an existing C Corp or LLC, and 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. 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 Four: File Form 2553, “Election by a Small Business”
According to §1361 of the Internal Revenue Code, S Corps must elect to be treated as such by filing Form 2553 with the IRS. You must make this election within the first 45 days after opening an S Corp to elect S status for the current year. If you miss this time frame (45 days from the formation date), you will have to wait until the next tax year to use the S status.
Step 5: Check Applicable State Law
In Pennsylvania, there is no need to file for a separate election with the state after opening S Corp. If you are an S Corp with the federal government, you are automatically one 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’s shareholders in states that impose a tax on the entity’s taxable income.
You will need your Certificate of Organization or Certificate of Incorporation, a copy of your Employer Identification Number (EIN) from the IRS, and Form 2553. You will also have to register your S Corp with the Pennsylvania Department of Revenue. Additionally, a copy of your prior year’s income tax return will help your lawyer determine the best entity structure for you: an S Corporation or an LLC taxed as an S Corporation.
A business or corporate lawyer with experience in S Corporations can provide you with valuable assistance and guidance through various stages of your business journey. Whether you are currently in the process of opening S Corp or already running one, a corporate lawyer can offer legal advice to help you ensure the smooth and compliant operation of your business.
S Corp lawyers can help with business formation, ensuring compliance with state and federal regulations, and providing tax planning strategies. Additionally, an S Corp lawyer can draft and review your documentation to make sure that it is legally sound and in alliance with your interests.
By having a qualified lawyer on your side, you can focus on growing your S Corporation while being confident that legal matters are taken care of.
Premiere Legal Solutions offers professional legal support and guidance on how to create an S Corp in Pennsylvania. Whether you are a seasoned entrepreneur or just taking the first steps into your business journey, we can provide personalized legal advice tailored to your needs. Don’t hesitate to give us a call at 267 245 0649 or message us here and let’s discuss the best options for you and your business!
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