An S-Corp isn’t a type of business. It’s a tax election.
This trips up most business owners. They think they need to form something called an “S-Corporation” with their state. They don’t. You form a corporation or LLC first. Then you elect S-Corp tax treatment with the IRS.
The state doesn’t care about your S-Corp status. The IRS does.
This guide covers both steps: entity formation and S-Corp election. By the end, you’ll know exactly how to start an S-Corp the right way, avoid common mistakes, and set yourself up for the tax savings that make S-Corp election worthwhile.
Key Takeaways
- Step 1: Form a corporation or LLC in your state
- Step 2: Obtain an EIN from the IRS (free, immediate online)
- Step 3: File Form 2553 (S Election) with the IRS
- Filing deadline: 2 months 15 days into tax year OR any time in the prior year
- S-Corp requirements: US entity, 100 or fewer shareholders, one class of stock, eligible shareholders only
- Costs vary by state: $50-$500 for formation + registered agent + payroll setup
- Once elected, S-Corp status continues until revoked or terminated
- Many choose to form LLC, then elect S-Corp taxation (simpler structure + S-Corp tax treatment)
Table of Contents
What is an S-Corp?
Before diving into formation steps, you need to understand what you’re actually creating. The confusion around S-Corps costs business owners thousands in unnecessary fees and missed opportunities.
A Tax Election, Not an Entity
S-Corp stands for Subchapter S Corporation. It refers to Subchapter S of the Internal Revenue Code, which allows certain businesses to pass income directly to shareholders without paying corporate-level tax.
Here’s the critical distinction:
- Corporation or LLC = Legal entity type (state law)
- S-Corp = Tax classification (federal tax law)
You can be an LLC that’s taxed as an S-Corp. You can be a corporation that’s taxed as an S-Corp. The legal structure and tax treatment are separate decisions.
When someone says they “formed an S-Corp,” what they actually did was form a corporation or LLC, then file Form 2553 with the IRS to elect S-Corp taxation.
The S-Corp Tax Advantage
Why bother with S-Corp election? One word: savings.
S-Corps provide pass-through taxation, meaning the business itself doesn’t pay federal income tax. Instead, profits flow through to shareholders’ personal returns. But here’s where it gets interesting.
With a standard LLC, all profits are subject to self-employment tax (15.3% on the first $168,600 in 2024, then 2.9% above that). With an S-Corp, only your salary is subject to payroll taxes. Distributions above your salary? No self-employment tax.
Example: Your business earns $120,000 in profit.
- As an LLC: You pay roughly $16,956 in self-employment tax on the entire amount.
- As an S-Corp: You pay yourself a $60,000 salary (payroll tax: ~$9,180) and take $60,000 as a distribution (payroll tax: $0). Total payroll tax: ~$9,180.
Annual savings: $7,776.
That’s real money. Over five years, that’s nearly $39,000. This is why profitable businesses elect S-Corp status.
S-Corp vs LLC vs C-Corp
Understanding the landscape helps you make the right choice:
| Entity Type | Tax Treatment | Self-Employment Tax | Complexity |
|---|---|---|---|
| LLC (default) | Pass-through | On all profit | Low |
| S-Corp | Pass-through | On salary only | Medium |
| C-Corp | Double taxation | None (wages taxed) | High |
The LLC taxed as an S-Corp combines the legal simplicity of an LLC with the tax advantages of S-Corp treatment. For most small businesses, this is the sweet spot.
For a deeper dive into this comparison, see our LLC vs S-Corp Complete Comparison and our Business Entity Tax Guide.
Who Should Consider S-Corp?
S-Corp election makes sense when:
- Net profit exceeds $40,000-$50,000 after paying yourself a reasonable salary
- You’re comfortable with payroll requirements (quarterly filings, W-2s)
- You’re US-based with eligible owners (no foreign shareholders)
- You want self-employment tax savings without the complexity of a C-Corp
If your business earns $30,000 annually, S-Corp election probably costs more than it saves. The payroll setup, tax preparation, and compliance requirements eat into any potential savings.
Use our S-Corp Tax Calculator to run your specific numbers before deciding.
S-Corp Requirements
Not every business qualifies for S-Corp election. The IRS sets strict eligibility requirements, and violating any of them terminates your S-Corp status retroactively.
Eligibility Requirements
| Requirement | Details |
|---|---|
| Domestic entity | Must be a US corporation or LLC |
| 100 or fewer shareholders | All family members count as one shareholder |
| Eligible shareholders only | Individuals, certain trusts, estates |
| No foreign shareholders | Must be US citizens or resident aliens |
| One class of stock | Can’t have preferred and common stock |
| Eligible business type | Not banks, insurance companies, or certain financial institutions |
These requirements aren’t suggestions. They’re hard rules enforced by the IRS.
Who Can Be a Shareholder?
The following can own S-Corp stock:
- US citizens
- US resident aliens (green card holders or those meeting substantial presence test)
- Certain domestic trusts (grantor trusts, qualified Subchapter S trusts, electing small business trusts)
- Estates
- Tax-exempt organizations (in limited circumstances)
Who CANNOT Be a Shareholder?
The following cannot own S-Corp stock:
- Non-resident aliens (foreign individuals without US residency)
- Partnerships
- Corporations (including other S-Corps)
- Most foreign trusts
- LLCs (unless single-member and disregarded)
This matters more than you might think. If your business partner is a Canadian citizen living in Toronto, you cannot elect S-Corp status. If you want to bring in a corporate investor, you cannot maintain S-Corp status.
One Class of Stock Rule
S-Corps can only have one class of stock, meaning all shareholders must have identical rights to distributions and liquidation proceeds.
You can have:
- Voting and non-voting shares (as long as distribution rights are equal)
- Different numbers of shares among shareholders
You cannot have:
- Preferred stock with priority distributions
- Different distribution percentages per share
- Special liquidation preferences
Warning: Even one ineligible shareholder or one day of having a second class of stock terminates S-Corp status retroactively. The IRS doesn’t give warnings. You find out during an audit, and suddenly you owe back taxes as a C-Corp.
Two Paths to S-Corp Status
You have two options for becoming an S-Corp. Most small businesses choose Path 2, but understanding both helps you make the right decision.
Path 1: Form Corporation + Elect S-Corp
This is the traditional approach. You form a corporation with your state, then elect S-Corp taxation with the IRS.
Advantages:
- Traditional corporate structure with clear formalities
- Stock certificates provide documented ownership
- More familiar to investors and lenders
- Required if you plan to eventually convert to C-Corp for venture capital
Process:
- File Articles of Incorporation with your state
- Create corporate bylaws
- Issue stock certificates
- Hold initial board meeting and document resolutions
- Obtain EIN from IRS
- File Form 2553 for S-Corp election
Best for: Businesses expecting significant growth, outside investment, or those who prefer traditional corporate structure.
Path 2: Form LLC + Elect S-Corp (More Common)
This approach gives you the legal flexibility of an LLC with the tax treatment of an S-Corp. It’s what most small business owners choose.
Advantages:
- Simpler formation process
- Flexible operating agreement instead of rigid bylaws
- Less ongoing formality required
- Same tax treatment as a corporation electing S-Corp
- Easier to manage for single owners
Process:
- File Articles of Organization with your state
- Create an operating agreement
- Obtain EIN from IRS
- File Form 2553 for S-Corp election
Best for: Most small businesses, solo owners, service businesses, and anyone who wants simplicity.
Which Should You Choose?
| Situation | Recommended Path |
|---|---|
| Solo owner, service business | LLC + S-Corp election |
| Planning to raise venture capital | Corporation |
| Want simplicity and flexibility | LLC + S-Corp election |
| Multiple investors planned | Corporation |
| Real estate holding company | LLC (probably skip S-Corp entirely) |
For most readers of this guide, LLC + S-Corp election is the right choice. You get liability protection, operational flexibility, and S-Corp tax savings without corporate formalities.
For detailed guidance on the conversion process, see our Converting LLC to S-Corp Guide.
Step-by-Step Formation Process
Here’s exactly how to start an S-Corp, whether you’re forming a new entity or electing S-Corp status for an existing LLC.
Step 1: Choose Your State
Most businesses should form in their home state. Here’s why the alternatives rarely make sense:
Home state (recommended for most):
- Where you live and operate
- No foreign qualification fees
- Simplest compliance
- One state’s rules to follow
Delaware:
- Popular for corporations expecting VC investment
- Favorable corporate law and court system
- But: You’ll still need to register as a foreign entity in your home state
- Result: Two sets of fees, two annual reports, more complexity
Wyoming/Nevada:
- No state income tax
- But: You pay tax where you earn income, not where you’re incorporated
- If you live in California, you pay California tax regardless of where you incorporate
The bottom line: Unless you have a specific reason (VC fundraising, complex corporate structure), form in your home state. Forming elsewhere just means registered agent fees in two states and filing requirements in both.
Step 2: Choose a Business Name
Your business name must be:
- Available in your state (search the Secretary of State database)
- Distinguishable from existing registered entities
- Properly designated:
- LLC: Must include “LLC,” “L.L.C.,” or “Limited Liability Company”
- Corporation: Must include “Inc.,” “Corp.,” “Corporation,” or “Incorporated”
Before settling on a name:
- Search your state’s business entity database
- Search the USPTO trademark database
- Check domain availability
- Consider how it sounds when spoken aloud
Don’t skip the trademark search. Using a name that infringes on an existing trademark can force an expensive rebrand later.
Step 3: File Formation Documents
For LLC:
File Articles of Organization (called Certificate of Formation in some states) with your state’s Secretary of State office.
Required information typically includes:
- LLC name
- Principal office address
- Registered agent name and address
- Member/manager information
- Organizer signature
State filing fees: $50-$500 depending on state. California charges $70. Texas charges $300. Massachusetts charges $500.
Processing time: Same day to 2-3 weeks. Most states offer expedited processing for an additional fee ($25-$100).
Need help with formation? Many of our clients use this business formation service to handle the state filing, operating agreement, and EIN registration.
For Corporation:
File Articles of Incorporation with your state.
Required information typically includes:
- Corporation name
- Number of authorized shares
- Par value (if any)
- Registered agent name and address
- Incorporator name and signature
- Principal office address
Filing fees and processing times are similar to LLCs.
Step 4: Create Governing Documents
For LLC – Operating Agreement:
Your operating agreement is your LLC’s rulebook. Even if your state doesn’t legally require one (most don’t), you need it.
The operating agreement should address:
- Ownership percentages
- Capital contributions
- Profit and loss allocation
- Management structure (member-managed vs. manager-managed)
- Distribution policies
- Voting rights
- Transfer restrictions
- Dissolution procedures
- S-Corp election provisions
For Corporation – Bylaws and Organizational Documents:
Corporations require more formality:
- Bylaws: Rules for corporate governance
- Stock certificates: Evidence of ownership
- Initial board resolutions: Documenting key decisions
- Shareholder agreement: Terms between owners (if multiple)
Step 5: Get Your EIN
An Employer Identification Number (EIN) is your business’s tax ID. You need it to:
- Open a business bank account
- File tax returns
- Hire employees
- File Form 2553
How to get an EIN:
Online (recommended): Apply at IRS.gov. It’s free and immediate. You’ll have your EIN in minutes.
By mail: Submit Form SS-4. Takes 4-6 weeks. There’s no good reason to do this unless you can’t complete the online application.
By fax: Submit Form SS-4 to your state’s fax number. Response within 4 business days.
The online application is available Monday-Friday, 7 AM – 10 PM Eastern. Complete it in one session; you can’t save and return.
Step 6: File Form 2553 (S-Corp Election)
This is the step that actually makes you an S-Corp for tax purposes.
What you need for Form 2553:
- Entity name and address
- EIN
- Date of incorporation/organization
- State of incorporation/organization
- Tax year election (calendar year for most)
- Shareholder/member information
- All shareholder/member signatures
Where to file: The IRS provides a list of addresses based on your state. Check the Form 2553 instructions for current addresses.
How to file:
- By mail: Send to the applicable IRS address
- By fax: 855-887-7734 (for most states)
Confirmation: The IRS sends a CP261 acceptance letter, typically within 60-90 days. If you don’t receive confirmation after 90 days, follow up by calling the IRS Business and Specialty Tax Line at 800-829-4933.
Pro tip: Make copies of everything before mailing. The IRS occasionally loses forms, and you’ll want proof of timely filing.
Step 7: Set Up Payroll
This step is non-negotiable for S-Corp owners who work in the business.
The IRS requires shareholder-employees to receive reasonable compensation through payroll. This means:
- Withholding federal and state income taxes
- Withholding and paying Social Security and Medicare taxes
- Filing quarterly Form 941
- Issuing W-2s at year-end
- Paying state unemployment tax (in most states)
When to set up payroll: Before your S-Corp election effective date. If you elect January 1, have payroll ready to run in January.
Payroll options:
| Service | Approximate Cost |
|---|---|
| Gusto | ~$40/month + $6/employee |
| ADP Run | Varies by plan |
| Patriot | ~$17/month + $4/employee |
| QuickBooks Payroll | ~$45/month + $6/employee |
You can also handle payroll manually or through your accountant, but for most business owners, a payroll service is worth the cost. We offer payroll services for small businesses if you’d prefer to outsource this requirement.
For guidance on setting the right salary, see our S-Corp Reasonable Compensation Guide.
Step 8: Open Business Bank Account
Open a dedicated business bank account. This isn’t optional.
Why it matters:
- Maintains liability protection (commingling funds pierces the corporate veil)
- Simplifies bookkeeping and tax preparation
- Required for accepting business payments
- Makes audits dramatically easier
What you’ll need to open an account:
- EIN
- Formation documents (Articles of Organization or Incorporation)
- Operating agreement or bylaws
- Government-issued ID
- Initial deposit (varies by bank)
Many banks offer free business checking accounts. Shop around for one with features that match your needs (online banking, integration with accounting software, etc.).
Form 2553 Filing Deadlines
Missing the Form 2553 deadline is the most common S-Corp formation mistake. The deadline is firm, and missing it by even one day means waiting until the following year (unless late relief applies).
For New Businesses
File Form 2553 within 2 months and 15 days of formation.
Examples:
- Form LLC on January 1 -> File by March 15
- Form LLC on July 1 -> File by September 15
- Form LLC on October 15 -> File by December 30
The election is effective from your formation date, so you’re taxed as an S-Corp from day one.
For Existing Businesses
| Goal | Deadline |
|---|---|
| S-Corp election for current year (2026) | March 15, 2026 |
| S-Corp election for next year (2027) | Any time during 2026 |
If you miss the March 15 deadline, you can still file for the following year. The current year will be taxed under your existing classification (likely as a sole proprietorship or partnership).
Weekend/Holiday Adjustments
If the deadline falls on a weekend or federal holiday, it’s extended to the next business day.
For 2026: March 15 falls on a Sunday. The deadline becomes Monday, March 16, 2026.
Critical Reminder
This deadline is firm. March 15, not March 16. File early, not on deadline day.
Plan to submit Form 2553 at least two weeks before the deadline. Mail delays, fax failures, and last-minute questions can derail a deadline-day filing.
For complete deadline information, see our S-Corp Tax Deadlines Guide.
Late Election Relief
Missed the deadline? Don’t panic. Late election relief is available under Revenue Procedure 2013-30, but it’s not automatic.
Rev Proc 2013-30 Relief Requirements
To qualify for late election relief, you must:
- Have intended to be classified as an S-Corp from the intended effective date
- Have reasonable cause for missing the deadline
- Have filed tax returns consistently with S-Corp treatment (as if the election was made)
- Request relief within 3 years and 75 days of the intended effective date
How to Request Late Relief
- Complete Form 2553 as you normally would
- Write “FILED PURSUANT TO REV. PROC. 2013-30” at the top of the form
- Attach a statement explaining:
- That you meet Rev Proc 2013-30 requirements
- That the entity has been treating itself as an S-Corp
- The reasonable cause for late filing
What Qualifies as Reasonable Cause
The IRS has accepted these explanations:
- Relied on a CPA or attorney who failed to file
- Unaware of the election requirement
- Company records destroyed in disaster
- Serious illness or death of responsible party
What Doesn’t Qualify
These explanations typically fail:
- “I didn’t know about the deadline” (ignorance of the law)
- “I was too busy”
- “I wanted to wait and see if S-Corp made sense”
If Relief Is Denied
- Your election becomes effective for the following year
- The current year is taxed under your previous classification
- You may need to amend previously filed returns
- Penalties and interest may apply
The lesson: File on time. Late relief creates uncertainty, delays, and potential IRS scrutiny. It’s not a backup plan; it’s a last resort.
Formation Costs
Let’s talk real numbers. S-Corp formation involves both one-time startup costs and ongoing annual expenses.
One-Time Startup Costs
| Item | Cost Range |
|---|---|
| State filing fee (LLC or Corporation) | $50-$500 |
| Registered agent (first year, if needed) | $0-$300 |
| Operating agreement/Bylaws drafting | $0-$500 |
| EIN application | Free |
| Business bank account | Usually free |
| Form 2553 filing | Free |
| Total Startup | $50-$1,300 |
The wide range reflects state differences and whether you use professional services. California’s $70 LLC fee plus a DIY operating agreement costs under $100. New York’s requirements with attorney-drafted documents can exceed $1,000.
Ongoing Annual Costs
| Item | Cost Range |
|---|---|
| State annual report/franchise tax | $0-$800 |
| Registered agent service | $100-$300 |
| Payroll service | $500-$2,000 |
| Form 1120-S tax preparation | $500-$1,500 |
| Bookkeeping (incremental increase) | $200-$500 |
| Total Annual | $1,300-$5,100 |
California’s $800 minimum franchise tax hits whether you’re profitable or not. Other states have no annual fee beyond a nominal report filing.
Break-Even Consideration
S-Corp election only makes sense when tax savings exceed these costs.
Rough math:
- At $50,000 profit: SE tax savings of ~$4,000-$5,000
- At $75,000 profit: SE tax savings of ~$5,500-$7,000
- At $100,000 profit: SE tax savings of ~$6,000-$8,000
If your ongoing costs are $3,000 annually, you need at least $50,000 in profit for S-Corp to make sense. Below that threshold, the LLC’s simplicity wins.
Run your specific numbers with our S-Corp Tax Calculator before committing.
State-Specific Considerations
The federal S-Corp election doesn’t automatically apply everywhere. Some states have their own requirements.
States That Follow Federal Election
Most states recognize the federal S-Corp election automatically. File Form 2553 with the IRS, and you’re done for both federal and state purposes.
States Requiring Separate Election
| State | Requirement |
|---|---|
| New York | File Form CT-6 within required timeframe |
| New Jersey | File CBT-2553 with state |
| Pennsylvania | Form REV-1640 (optional, but affects tax treatment) |
| Arkansas | Separate state election required |
Check with your state’s department of revenue or a local CPA if you’re unsure about requirements.
State Taxes to Consider
| State | Note |
|---|---|
| California | $800 minimum franchise tax annually |
| Texas | Franchise tax (margin tax), not income tax |
| New York | Additional franchise taxes and fees |
| No-income-tax states (FL, TX, WA, etc.) | Still may have franchise taxes or fees |
Don’t assume you avoid state filing just because you’re in a no-income-tax state. Texas has no income tax but does have a franchise tax that applies to most businesses.
Common Formation Mistakes
After helping hundreds of businesses through S-Corp formation, we see the same mistakes repeatedly. Avoid these:
Mistake 1: Missing Form 2553 Deadline
File early, not on deadline day. Mark your calendar for February if the deadline is March 15.
The fix: Set a reminder for 30 days before the deadline. Submit at least two weeks early.
Mistake 2: Not Getting EIN First
You need an EIN to file Form 2553. Some business owners file formation documents, then sit on getting an EIN until it’s too late.
The fix: Apply for your EIN the same day your formation is approved. It takes 10 minutes online.
Mistake 3: Skipping the Operating Agreement
Even if your state doesn’t require an operating agreement, you need one. It defines how your business operates and addresses S-Corp-specific issues.
The fix: Draft an operating agreement before filing Form 2553. Include provisions for S-Corp compliance.
Mistake 4: Delaying Payroll Setup
S-Corp owners must receive reasonable compensation from day one of the election. Setting up payroll in December for a January 1 election doesn’t work.
The fix: Have payroll running before your election effective date. Issue at least one paycheck in the first month.
Mistake 5: Mixing Personal and Business Funds
Using your personal checking account for business transactions undermines your liability protection and creates accounting nightmares.
The fix: Open a business bank account before your first business transaction. Use it exclusively for business.
Mistake 6: Choosing the Wrong State
Forming in Delaware sounds sophisticated, but for a local service business, it just creates extra costs and compliance.
The fix: Form in your home state unless you have a specific, compelling reason not to.
Frequently Asked Questions
What’s the difference between S-Corp and LLC?
An LLC is a legal entity type created under state law. S-Corp is a tax election filed with the IRS. You can be an LLC that elects S-Corp taxation. Most small businesses choose this combination for simplicity plus tax savings.
Can I start an S-Corp by myself?
Yes. Single-owner LLCs and corporations can elect S-Corp status. You’ll be the sole shareholder and must pay yourself reasonable compensation as a W-2 employee.
How much does it cost to start an S-Corp?
Startup costs range from $50-$1,300 depending on state and whether you use professional services. Ongoing annual costs typically run $1,300-$5,100 including payroll, tax preparation, and state fees.
Should I form in Delaware?
For most small businesses, no. Form in your home state. Delaware makes sense for complex corporate structures or VC fundraising, but creates extra cost and complexity for typical small businesses.
When is the S-Corp election deadline?
New businesses: Within 2 months 15 days of formation. Existing businesses: March 15 for current year election, or any time during prior year for next year.
Do I need a lawyer to start an S-Corp?
Not required, but helpful for complex situations involving multiple owners, specific operating agreement needs, or unusual circumstances. Many solo owners successfully form without a lawyer using state filing websites and templates.
How long does S-Corp formation take?
State formation: 1-14 days depending on state and expediting. EIN: Immediate online. Form 2553 processing: 60-90 days. Total: You can be operational in days, though IRS confirmation takes weeks.
Can I convert my existing business to S-Corp?
Yes. Existing LLCs file Form 2553 to elect S-Corp taxation. Sole proprietors form an LLC (or corporation) first, then elect. The process is the same; you’re just not starting from scratch.
What happens after I file Form 2553?
The IRS processes the election and sends CP261 acceptance letter within 60-90 days. Meanwhile, operate as an S-Corp: set up payroll, track accounting as S-Corp, and issue a W-2 to yourself. If no response after 90 days, follow up with the IRS.
Does my S-Corp need a registered agent?
If your state requires one (most do), yes. You can serve as your own registered agent if you have a physical address in the state. Otherwise, use a registered agent service ($100-$300/year).
Next Steps
Ready to start?
- Choose your structure: LLC + S-Corp election (most common) or Corporation
- Form your entity: File with your state’s Secretary of State
- Get your EIN: IRS.gov, free and immediate
- File Form 2553: Don’t miss the deadline
- Set up payroll: Before year-end
- Open bank account: Keep funds separate
The S-Corp election can save you thousands annually in self-employment taxes. But the savings only materialize if you set it up correctly, meet ongoing compliance requirements, and maintain proper records.
If you’re unsure whether S-Corp makes sense for your situation, or you want professional guidance through the formation process, we can help. Our team handles entity selection, election timing, payroll setup, reasonable compensation analysis, and ongoing compliance. We’ll make sure you start right and stay compliant.
Form your LLC or Corporation → (the service many of our clients use)