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Last Updated: 3/19/24

If you’re considering starting an S corporation in Arkansas, you’re looking at a path that could lead to significant tax savings for your business. An S corp is a tax classification that can be a smart choice for business owners aiming to optimize their tax situation. This classification is particularly appealing for Arkansas-based limited liability company (LLC) owners. Typically, income from an LLC is subject to self-employment taxes, but by electing to be taxed as an S corp, you can strategically pay yourself a salary from the business’s earnings. Here’s where it gets interesting: You’ll only need to pay self-employment taxes on the salary you receive. Any additional profits distributed as dividends won’t be taxed the same way, potentially resulting in notable tax savings.

This guide will introduce you to the process of setting up an S corp in Arkansas, focusing on how to navigate the tax benefits and helping ensure you understand every step to successfully transition your business to this tax-efficient status.

Requirements for an Arkansas S Corp

Prior to choosing your business’s tax structure, it’s a good idea to understand the requirements and limitations of an Arkansas S Corp according to the IRS. 

  • You must have a domestic corporation or LLC
  • The corporation can have no more than 100 shareholders
  • All S corporation shareholders must be private individuals (not other business entities)
  • S corporation shareholders must reside in the US
  • The business may only issue one class of stock, meaning that all members must have the same distribution amount
  • The corporation needs to be eligible — ineligible entities include certain financial institutions, insurance companies, and domestic international sales corporations

What to know before creating an S Corporation in Arkansas

An S Corporation is a great way for many businesses to save on taxes, but it’s not the best option for every business. If you’re questioning what tax structure is right for you, consider contacting a tax or finance professional. Upon the formation of your limited liability company or corporation, the default tax election is that of a C corporation. If you do nothing to change it, this will be the structure by which you are taxed.

What is the difference between an S Corporation and a C Corporation?

The biggest difference between C Corporations and S Corporations is taxes. C Corporations pay tax on their income as a business. Taxes are also paid by owners and employees on whatever income is received from the business. This is considered “double taxation.” 

An S Corporation doesn’t pay taxes as a business. Instead, taxes are paid on the owners’ personal income tax return. Being taxed directly at the personal income tax level is called “pass-through taxation,” and is one of the primary benefits of an S Corp. An S Corporation may still have to pay income tax on certain income depending on the type of business.

How to Start an S-Corp in Arkansas

The process of meeting Arkansas S Corporation requirements starts with making sure you have a properly formed Arkansas corporation or limited liability company. The next step is filing the proper forms to become an Arkansas S Corporation with the Internal Revenue Service.

Choosing your business structure is an important step for any company. There are important differences between forming as an Arkansas corporation vs. LLC that you should be aware of before making that decision.

An Arkansas corporation has a more formal management structure that requires a cadence of meetings and keeping accurate corporate records. A corporation is made up of stockholders and has the ability to raise capital by issuing stock. Conversely, limited liability companies have more flexible management structures and don’t have formal meeting requirements.

Here are the steps to follow when registering a business, followed by how to register your business as an Arkansas S Corp. 

S-Corp Election Steps for LLCs

For detailed formation steps, see our Arkansas LLC formation guide.

  • Step 1 – Choose a Business Name
  • Step 2 – Appoint a Registered Agent in Arkansas
  • Step 3 – Decide on your directors or managers
  • Step 4 – File Articles of Incorporation/Articles of Organization
  • Step 5 – Apply for an EIN
  • Step 6 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Arkansas Corporation formation guide.

  • Step 1 – Name Your Arkansas Corporation
  • Step 2 – Appoint Directors
  • Step 3 – Choose an Arkansas Registered Agent
  • Step 4 – File the Arkansas Articles of Incorporation
  • Step 5 – Create Corporate Bylaws
  • Step 6 – Draft a Shareholder Agreement
  • Step 7 – Issue Shares of Stock
  • Step 8 – Apply for Necessary Business Permits or Licenses
  • Step 9 – File for an EIN and Review Tax Requirements
  • Step 10 – Submit Your Corporation’s First Report
  • Step 11 – Apply for S Corp status with IRS Form 2553

File Form 2553 to elect S Corporation status

Regardless of what type of business structure you choose, your last step to complete business corporation filing requirements is to file Form 2553 with the IRS and wait for approval. 

This should be completed after you have obtained your federal employer identification number (EIN), because it will be needed for the form. Corporations default to C Corporation when they register for an EIN, and LLCs default to a pass-through tax entity. If your business is an LLC, you might need to file an election for C Corporation for before filing Form 2553 for S Corporation status.

Note: You will likely also need an EIN to open a business bank account.

Pros and cons of Arkansas S Corp election 

Are you trying to determine if the S Corporation tax designation is right for your new business? Choosing your tax structure is highly dependent on your business’s unique circumstances. Here are some factors to consider. 

Pros of S Corp election

Pass-through taxation is the most prevalent benefit of electing to file as an S Corporation. Self-employed business owners may also opt for classifying some of their income tax as distribution and some as salary. This could save on self-employment taxes. An Arkansas S Corp has the option to use either the accrual or cash accounting method if you don’t keep an inventory. 

Cons of S Corp election

S Corp election involves filing all of the initial and ongoing paperwork to form and maintain an official Arkansas business. Businesses that have elected S Corporation status must adhere to other obligations of the business structure including elections, notification, and ownership restrictions.

S Corporations can also only have one class of stock, and no more than 100 shareholders, although it can have both non-voting and voting shares. S Corps are subject to increased IRS scrutiny because of the options for payment classification. 

Get help establishing a Arkansas LLC with S corp tax election

Creating your Arkansas S Corporation doesn’t have to be complicated. In fact, we can even start your S Corp for you as part of our LLC formation service. There’s a lot that goes into starting and maintaining a business. You don’t have to know it all. We’re here to help with all your Arkansas business needs.

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Arkansas S Corp FAQs

  • S Corporations are qualified small businesses that have limited corporate shareholders or members but aren’t subject to corporate double taxation. 

  • Both limited liability companies and corporations can make an S Corp election. This should occur not more than 2 months and 15 days after the beginning of the tax year the election is meant to take effect — or at any time during the tax year preceding the tax year it is to take effect. 

  • While the rule of thumb is that Arkansas corporations pay the state’s corporate income tax, business entities that elect to be taxed as S corporations are exempt from it. However, like all other entities doing business in the state, Arkansas S corporations have to file an annual franchise tax report and their business profits are subject to the state’s franchise tax.

  • Pass-through taxation is the most prevalent benefit of electing to file as an S Corporation. You may also benefit from using a cash accounting method and could potentially save on self-employment taxes.

  • Choose a name for your business according to Arkansas LLC or corporation business naming laws. Ensure that no other Arkansas company is using the same or a similar name.

  • The IRS needs to know that you are an S Corporation, but this doesn’t have to be stated in the LLC’s name or marketing material.

  • Arkansas S Corp taxes are paid on the owners’ personal income taxes. Other taxes may apply depending on the type of business. If you have any confusion surrounding tax issues, seek the advice of a certified tax professional.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

Elect S Corp Status in Arkansas