Let’s take a closer look at what an S Corp is, how to form one in Hawaii, and how we can help make the process easy.
As a business owner in Hawaii, protecting yourself and your business is a significant priority. Forming a Hawaii S Corporation (or S Corp) is one way to protect yourself and your business, but the formation process can be confusing. If you’re wondering how to form a corporation in Hawaii, you’ve come to the right place!
First thing to note is that before you can apply for an S-Corporation status, you’ll have to establish either an LLC or a Corporation, if you haven’t already done so. We’ll first walk you through the steps for forming these business entities and then show you how to apply to become an S-Corp.
You can pick almost any name you want for your entity in Hawaii, but there are a few rules. First, you can’t use a name that’s already being used by other active business entities in Hawaii. For a Hawaii LLC, you need to have a variation of “limited liability company” or “company” in the name. For a Hawaii corporation, you need to make sure the name includes a variation of “corporation,” “incorporated,” or “limited.” Check out how to reserve your business name.
Register Your Business as an S Corp
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You have to appoint a registered agent for your entity in Hawaii and needs to be a person or entity located in the state. A Hawaii registered agent isn’t an actual employee or representative of your business, instead, this is just a person or company you’ve appointed to receive official documents and notifications on your company’s behalf.
Your entity needs to have a governing body. For an LLC, you have to appoint at least one manager. For a corporation, you need to appoint a director. Note that either a director or a manager can be an owner of the company, but they don’t have to be one.
For Hawaii S Corporations, you need to file Articles of Incorporation with the Business Registration Division (BREG) of the Hawaii Department of Commerce and Consumer Affairs (DCCA) to form your entity. For an LLC, you have to file Articles of Organization.
You must file Form 2553 with the Internal Revenue Service to convert an entity to an S-Corp. All necessary requirements and forms can be located on the IRS website. A mandatory prerequisite to filing Form 2553 is an Employer Identification Number. A Hawaii LLC may need to elect to be taxed as a corporation first by filing IRS Form 8832. You must file for an S Corporation election at specific times. To convert an entity for the current tax year, the conversion must occur during the first two months of that year. After the initial two months, you may still be able to file Form 2553, but the conversion won’t occur until the next tax year.
S Corporations are a great option for many business owners, but they aren’t without their drawbacks. One issue is that the IRS needs certain Hawaii S Corporation requirements to be met before you can convert your business to this tax election. The business must:
A Hawaii S Corp may not be the ideal structure if you want to raise lots of capital from investors. But it’s worth discussing your options with a professional such as a tax lawyer or accountant.
Does the S Corporation status fit your company’s needs? This will depend largely on what you’re looking for in your business entity.
Being incorporated as an S corporation may benefit your company in several different ways, including:
If one of your main worries when deciding which type of company to set up is whether you’re going to end up paying too much tax, then an S Corporation may be best suited for you. See our Tax Calculator to estimate S Corp taxes.
Depending on the kind of business you run, there may be some downsides to an S corporation election. Some disadvantages include:
We recommend that you consult a qualified attorney before deciding if an S Corporation works best for you.
You don’t actually “form” an S Corporation like you would an LLC or corporation. Instead, you’ll need to convert your existing business entity into an S Corporation. By default, when you form a corporation, it’ll be a C Corporation and not an S Corp.
An S Corporation is similar to a corporation in that both offer limited liability, but the way they are taxed is different. An S Corp is a tax election made by corporations or LLCs. Electing S Corp status changes how the entity is taxed. S Corps are taxed as a pass-through entity. This means that the entity doesn’t pay a corporation income tax. Instead, the taxes pass through to the shareholders. Doing this can help avoid double taxation.
Double taxation can occur with C Corps because C Corporations pay income tax at the corporate level. When the C Corp makes a distribution to the shareholders, the shareholders pay taxes on the dividend. In this scenario, the corporation’s income could be taxed twice as corporate income tax and then as a tax on the dividend.
C Corporations can issue more shares of stock and more classes of stock than an S Corporation, but for many, that’s not the most significant difference between S Corporations and C Corporations. A big difference and big draw for many who elect to be S Corporations instead of C Corporations is how S Corporations normally pay income taxes.
C Corporations pay double income taxes because the business pays income taxes at the corporate level, and then each shareholder has to pay taxes on the distributions they receive from the corporate income. On the other hand, S Corporations normally enjoy pass-through taxation. Pass-through taxation means that the S Corporation normally doesn’t have to pay taxes on the corporate income—only the shareholders pay taxes on their shares of the corporate income.
To create an S Corporation, first, you’ll have to form a business that falls within the limitations identified above. To actually convert to an S Corp, you need to file Form 2553 with the IRS within the timeframe listed above.
Yes. Just like Hawaii corporations, limited liability companies can elect S Corp status. This election is usually for tax purposes. LLC owners typically pay self-employment taxes. With S Corp status, owners could bypass this tax if they pay a reasonable salary. Of course, the owners still pay income tax on their salary, but this can still be an advantage over paying self-employment taxes on the entire income of the LLC. For more information, check out our LLC Tax Info page. Check out our article on the differences between an LLC and a S-Corp.
If all this seems overwhelming, don’t panic! We can help simplify the process of forming your entity and converting it to a Hawaii S corp. As a business owner, you have a lot to handle, so let us take some of the work off your hands. In addition to forming your entity, we offer many other services! We can help you make a Business Plan, Get an EIN, and rest easier with our Worry-Free Compliance. We don’t just want to help you start your business, we want to help you keep it running as well.
Our formation services take much of the guesswork out of forming a Hawaiian corporation or a Hawaiian LLC. We understand that you have more important things to do than spending hours figuring out how to get your entity set up. That’s why we offer a range of products that allow you to spend less time sweating the small stuff and more time making a profit.
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Start Your S Corp in Hawaii
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S Corp election lightens your company’s tax burden and can protect your personal assets from business liabilities.
You can choose any name that isn’t already taken and abide by the state’s business naming laws.
The IRS needs to know that you’ve elected S Corp status for tax purposes, but there’s no requirement that this S Corp status is reflected in your name.
S Corp taxes will likely be passed through directly to you as personal income tax. Consult a professional if you need assistance with your taxes.
Yes. For state income tax purposes, Hawaii treats S corporations the same way the federal government does for federal income taxes. However, a Hawaii S corporation will still need to file a Hawaii S corporation income tax return (Form N-35).
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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