How to Set up an S Corporation?
Introduction
An S corporation is a great business form if you have the right characteristics and goals. It's easy to set up, and it has fewer legal requirements than other types of corporations. As an added bonus, you can pay yourself as much or as little as you want in dividends (within certain limits) without having to pay income tax on those dividends! But even though setting up an S corporation is relatively simple, there are some important steps that must be followed to make sure your business gets off on the right foot.
Choose your Business Name
Choosing the right business name is important. You want to make sure it's easy to remember and spell, as well as something that isn't too similar to other businesses in your industry. If you're interested in registering your corporation with the state, you will need to do so before choosing a formal title for your company. State filing fees vary from state to state but can be found online at filing fees by state or by county through the Secretary of State website (https://www.sos.ca).
File Articles of Incorporation
When choosing the name for your corporation, you will also need to file articles of incorporation with the state. After you've chosen a business name, you can file it with the Secretary of State or Corporation Commission in your state. This is an important step because filing articles of incorporation makes it official that your company exists.
To file, you will need:
- A completed Articles of Incorporation form
- The appropriate filing fee (varies by state)
Once you have this, you can send it off to your local secretary of state and they’ll handle the rest.
Create Corporate Bylaws
A bylaw is a rule or regulation that applies to the organization. It's also known as an internal policy.
Bylaws are very important because they establish how your business will be run, including how many directors there will be, what their duties are, how long each director should serve, and who has voting rights. You can also include other pertinent information such as conflicts of interest or indemnification (basically saying that if someone sues you for doing something wrong on behalf of the company, they won't sue you personally).
The best way to create corporate bylaws is to consult an attorney or someone who knows what they're doing with corporations (like your CPA). If this isn't possible right now, try searching online for sample bylaws so you get an idea of what's involved before moving forward with creating yours.
Create Stock Certificates
Stock certificates are the physical representation of your company's stock. The certificate is a legal document and should be signed by the issuing officer (the CEO), who also keeps a copy for their records. As with any other asset, it's important to keep proof of ownership in safekeeping.
Build up Capital
When you do the math, and determine how much money you need on hand to pay your taxes, it's best to start with a cushion of at least six months' worth of income or expenses. This can be done by borrowing from banks, using personal funds, or taking out loans with friends or family members. Just make sure that when you borrow money for this purpose—whether it's from a bank or someone working in another field like real estate—you have the ability to repay the loan within a reasonable period of time (usually three years).
Takeaway
An S corp is a great business form if you have the right characteristics and goals. For example, it is a good business form if you want to limit your personal liability, or pass through income and losses to shareholders.
Conclusion
Setting up an S corp is easy and can be done in a few weeks. However, as with all business structures, you should consult with a professional before making any decisions.
