File a Georgia S Corp

Georgia S Corp Filing Requirements

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:

• Be a domestic LLC or corporation
• Only have one class of stock
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations

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.

Considerations for Georgia S Corp Taxes  

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.

How to Create an S Corp in Georgia

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.

Forming a Georgia LLC

1. Choose a unique name for your Georgia limited liability company
2. Appoint a registered agent 
3. File your Georgia LLC Articles of Organization
4. Create an operating agreemen
5. Register for your EIN Number
6. Apply for S Corp status with IRS Form 2553

For more details visit our “Start a Georgia LLC” page.

Forming a Georgia Corporation

1. Name your Georgia corporation
2. Appoint Directors
3. Choose a Georgia Registered Agent
4. File the Georgia Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

If you’d rather form a Georgia corporation, follow the instructions on our Georgia corporation page.

File form 2553 to apply for S corp status

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: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

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.

Pros and Cons of Filing as an S Corp in Georgia for LLCs and Corporations

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.

Advantages of S Corp Status for C Corporations

If you have a C corporation, filing as an S corp has these advantages:

Pass-Through Taxation

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.”

Writing Off Losses

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. 

Qualified Business Income Deduction

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).  

Advantages of S Corp Status for LLCs

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.

Self-Employment Taxes Explained

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.

Dividing Salary and Profits

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. 

Reasonable Compensation

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.

Disadvantages of S Corp Status for LLCs

S corp status also has drawbacks for LLCs, though:

Stricter Requirements 

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.

More IRS Scrutiny

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.

Extra Accounting and Bookkeeping

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.

Disadvantages of S Corp Status for C Corporations

S corp status also has some disadvantages for C corps:

Limited Number of Shareholders

As we said, an S corp can have no more than 100 shareholders, while a C corporation has no such restriction.

Limited Types of Shareholders

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. 

One Class of Stock

Corporations can often attract investors by offering preferred stock, but the IRS doesn’t allow this for S corps.

More IRS Scrutiny

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.

Keeping Your S Corp Compliant

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.

Georgia and Federal Resources

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.