Are you considering setting up a company in the Peach State as a Georgia S corp? You’re not alone. Many entrepreneurs are filing to become an S corporation because of the potential tax savings. But how do you go about setting up an S corp in Georgia, and what is an S corp, anyway?
First, you need to understand what an S corporation (S corp) is (in Georgia or elsewhere). Despite having the word “corporation,” it’s not a type of corporation or any other business structure. Instead, it’s a special tax status that either a limited liability company (LLC) or a corporation can apply for with the Internal Revenue Service (IRS) if it meets the right criteria. We’ll go through those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for your company.
Learn more about S corps and how they could lower your tax bill.
For the IRS to accept your application for S corp status, you must meet the filing requirements of the Internal Revenue Code. To qualify for S corp tax status, a business must:
And so, not all business entities are eligible for S corp election. But if your business falls within these parameters, you can apply for an S corp election.
To get a Georgia S corporation, you’ll need to create either a limited liability company (LLC) or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.
To form an LLC in Georgia, first pick a name for your business that’s unique to Georgia and follows the state’s naming guidelines. From there, appoint a Georgia registered agent, file your Articles of Organization with the Georgia Secretary of State, and pay any state filing fees. Write an operating agreement for your LLC to spell out how it will be run and organized. Finally, get an employer identification number (EIN) from the IRS. For more specifics on this process, visit our “Start a Georgia LLC” page.
If you’d rather form a Georgia corporation, follow the instructions on our Georgia corporation page.
When Georgia approves your LLC or C corporation formation, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status.
The IRS requires that you complete and file your Form 2553:
One caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.
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In an S corp, the business itself doesn’t usually pay federal income tax. But does an S corp in Georgia pay Georgia income tax?
For an S corp to be recognized as an S corp for Georgia state tax purposes, its nonresident shareholders have to execute an agreement, Form 600 S-CA. Under this agreement, shareholders agree to pay Georgia income taxes on their portion of the corporation’s Georgia taxable income; if not, the S corp election will be terminated. When the agreements are executed, the business needs to file Form 600S.
Once Georgia recognizes the S corp election for state tax purposes, it will be taxed as a pass-through entity (meaning the business itself won’t pay state income taxes on the profits, just the owners). However, S corps in Georgia must still pay the state’s corporation net worth tax.
To stay in compliance, you must file a Georgia annual report whether your S corp is an LLC or a corporation. The purpose of the report is to update the state on basic information about your business. The report is due April 1 annually, and there’s an accompanying fee of $50, $60 if you file by postal mail.
If your S corp is a corporation, it’s required to have an annual shareholders meeting. The time and place should be spelled out in the corporation’s bylaws. The corporation must also keep corporate records, including a list of shareholders, minutes from all director and shareholder meetings, and a record of actions by taken by the directors and shareholders in or out of a meeting.
While S corp status does come with a number of benefits for some businesses, making this election might not be right for every company. Carefully weigh the pros and cons before deciding how you want to proceed. Consult a tax professional about whether the S corp election would be best for your business.
If you have a C corporation, filing as an S corp has these advantages:
One big minus for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits at the business level. And when those profits are distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.”
Just as company profits pass through to the owners of an S corp, so do the business’s losses. Unlike the shareholders of a C corporation, S corp owners can write off the business’s losses on their personal income statements.
Under the recent Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.
Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).
S corp status also has some disadvantages for C corps:
As we said, an S corp can have no more than 100 shareholders, while a C corporation has no such restriction.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That may limit your ability to expand internationally. You also can’t have corporations or partnerships as shareholders.
Corporations can often attract investors by offering preferred stock, but the IRS doesn’t allow this for S corps.
With the extra limitations on S corps, the IRS watches them more closely to see if they’re in compliance. Thus, your corporation is more likely to get audited.
Having an S corp election brings a different set of pros and cons for an LLC.
The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations (the default form of corporation). A traditional LLC already has pass-through taxation (which we’ll explain later), so the benefits of S corporation election for an LLC come from federal self-employment tax.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their portion of business profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.
But when the members have S corp status for their LLC, they can be compensated in two ways, by receiving their share of the profits and by being employed by the LLC. Once they do that, shareholders pay taxes for Social Security and Medicare only on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business.
There is one catch: The IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.05 and avoid contributing anything to Social Security and Medicare.
So, what is “reasonable compensation”? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.
S corp status also has drawbacks for LLCs, though:
S corps have more conditions that must be met than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
The “reasonable salary” restrictions mean that the IRS monitors LLCs filing as S corps more closely. That could result in a greater chance of being audited.
Having an LLC that files as an S corporation will likely mean more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start. Your taxes will be more complex, as well.
You’ll need to first set up an LLC or C corporation if you haven’t already done so. Then you’ll need to file Form 2553, Election by a Small Business Corporation, with the IRS.
When an S corp is recognized as such by Georgia, it’s treated as a pass-through business entity. That means that the profits will only be taxed on the owner’s individual tax return like any other income. Normal Georgia state income tax applies.
An LLC is a legal business structure, but an S corp refers to a federal tax election that an LLC or corporation can make. For more information, see our LLC vs. S Corp in Georgia page.
Filing for S corp election doesn’t cost anything at the federal or state level in Georgia. However, if you haven’t yet formed an LLC or a corporation, you’ll need to pay a filing fee of $100 for an LLC and $100 for a corporation.
Now that you know more about Georgia S corps and the process, are you ready to form an LLC with an S corp election? Our S corp service can help you do that. Plus, we offer other services to help you run and grow your business and stay in compliance. Contact us today to get started and make your entrepreneurial dream a reality.
For more information about how S corps and other pass-through entities are treated in Georgia and other important tax information, see the Georgia Department of Revenue website. The IRS website can also provide more information on the federal guidelines for S corporations. We recommend having a trusted Georgia tax advisor or accountant. They can help you through legal and financial challenges, helping ensure compliance and tax savings.
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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