As a business owner, one of the things foremost on your mind is likely taxes. When you pay taxes, how can you keep your burden as low as possible? For an LLC or corporation, setting up an S corporation may help. This article will guide you through the process of forming an Indiana S corporation.
“S corporation” doesn’t refer to a type of business entity, but rather a tax status. For a limited liability company (LLC), filing as an S corp could provide savings on self-employment taxes for the owners. For a C corporation (the default form of corporation), setting up an S corporation allows it to avoid double taxation.
You can read more about S corporations and their pros and cons on our “What Is an S Corporation?” page.
As we explained, an S corp isn’t a separate legal business structure. Instead, it’s a tax classification that either an LLC or a corporation can apply for with the IRS, provided it meets the necessary criteria. We’ll outline those requirements and the steps you would need to take to file as an S corp if you decide that it’s right for your business. We’ll also explain how Indiana taxes S corporations.
If you’d like to start an LLC with S corp election, our S corp service can help you do just that. We also have many other services to help you run and grow your business and keep it in compliance with the state.
Before you make a decision about setting up your business as an S corp, know that S corporations have some filing requirements and limitations. According to the federal government, to qualify for S corp election, an entity must:
If your business entity meets the above requirements, read on to learn how to start an S corp in Indiana.
To start an Indiana S corporation, you’ll first need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.
Below, we’ll walk you through the steps of setting up an Indiana S corporation. First, we’ll show you how to form an LLC in Indiana. If you’d rather form an Indiana corporation instead, follow the instructions on our Indiana corporation page. Afterward, join us in Step 6, and we’ll show you how to file for S corp tax treatment as either an LLC or corporation.
Choose a name for your Indiana LLC. Brainstorming a name for your new business can be fun, but just remember you have to conform to Indiana naming requirements. If the Indiana Secretary of State rejects your business name, your whole filing will be rejected. You’ll have to start the whole process over.
Whatever name you choose will need to comply with Indiana law for naming businesses (IC 23-0.5-3). Among them are:
When choosing a name for your limited liability company, you need to ensure that it’s unique from any other business in the state of Indiana. You can do a quick business search by following the instructions on our Business Entity Search for Indiana page. There, you can verify that the name you want is available.
When using the name availability search, the Indiana Secretary of State website cautions, “It is only a preliminary search, meaning the name cannot be guaranteed as available until the final processing is completed at the time of filing. You should not rely, in any way, upon this preliminary information.”
Also, be aware that the state doesn’t check to see if your desired business name is already trademarked by someone else. You’ll need to do additional research to see if the name is trademarked at the federal or state level.
If you’re having trouble thinking of a unique and effective name, check out our “How to Name Your LLC” page for inspiration.
When you do find an available name, the state gives you the option to reserve it for 120 days for a fee. You may want to do this if you’ve found the perfect name but aren’t quite ready to file your Articles of Organization yet.
Register Your Business as an S Corp
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Appoint a registered agent for your LLC. The state and anyone who needs to contact you for legal reasons, such as notification of a lawsuit, need to be able to contact your business. That individual or business entity is called a registered agent in Indiana. You’re required by law to have one.
According to Indiana Code Section 23-0.5-4-3, a registered agent in Indiana must be an individual, a general partnership, a domestic filing entity, or a registered foreign entity with a physical street address in the state. Note that the LLC entity itself can’t serve as its own registered agent in Indiana.
The address where the registered agent is located is called the registered office. It can’t be a P.O. box because some legal notices must be delivered in person. Your registered agent also needs to be available at the registered office during normal business hours to receive service of process in person.
Whomever you choose to be your registered agent, you’ll need to get their consent to serve as your agent. You’ll be asked to confirm this when you complete your Articles of Organization later.
Some new business owners assume they should appoint themselves as their company’s registered agent. However, this approach may have hidden dangers. For example, you could be in the middle of a meeting or client presentation when a process server walks in to deliver a notification that you’re being sued, embarrassing you and derailing the meeting.
Working with an outside registered agent service can help you focus on your business with reduced stress. Additional benefits of hiring an outside registered agent service like ours include:
File your Articles of Organization with the Indiana Secretary of State. Once approved, this step makes your Indiana LLC official. You’ll also need to pay a filing fee at the time you submit the Articles.
Filing official government documents like this can be intimidating for many people, which is why we’re here. With our business formation plans, our team of professionals handles the filing for you. We make sure it’s done quickly and correctly the first time. But, although we can handle this for you, we’ll show you how the process works below.
You can file your Articles of Organization online, by postal mail, or in person. To do so online, you’ll first need to create an account with Access Indiana, which you’ll use to access Indiana’s website for registering businesses, “INBiz.”
To complete the Articles of Organization, you’ll need to know the following information:
Be aware that, once submitted, this information in your Articles of Organization becomes public record.
Processing times vary, but your Articles are usually approved or rejected within 24 hours when you file online or in person. Filing by mail can take significantly longer, approximately 5 to 7 business days.
Create an LLC operating agreement. Operating agreements outline the rules and procedures for the management of the LLC as well as establish ownership percentages, how profits are divided among members, and much more.
Your Indiana operating agreement also makes your business appear more legitimate to banks, investors, potential business partners, and the courts. While the state doesn’t legally require you to file an operating agreement, if you don’t have one, your LLC will be governed by default by Indiana’s LLC laws, which might not reflect your wishes.
Once an operating agreement is signed by all the members, it becomes legally binding. You don’t need to file it with any government agency, but keep it with your other important legal business documents so you can refer to it easily.
Typical concepts in an LLC operating agreement may include:
Unsure as to how to create an operating agreement for your LLC? We offer a customizable template to help get you started.
Apply for a federal employer identification number. Unless you’re a single-member LLC without employees (and sometimes even then), you’ll likely need to get an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Even if you don’t legally need an EIN, getting one can help you open a business bank account or obtain credit to grow your business.
You can get your LLC’s EIN through the IRS website, by mail, or by fax. If you don’t want to deal with that particular government agency, we can get it for you. Our EIN service eliminates the hassle.
If your company will have employees or collect sales tax, you may need to register your LLC with the Indiana Department of Revenue and receive an Indiana tax identification number. For instructions on how to register your business, visit the Secretary of State business services division (INBiz) website.
Complete and submit the form to apply for S corporation tax election. Once your LLC or corporation formation is approved by Indiana, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status.
The Internal Revenue Service requires you to complete and file your Form 2553:
One note for limited liability companies wanting 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 file both Form 8832 and Form 2553 together via USPS-certified mail.
Every one of the members or shareholders must sign the consent statement portion of the form. The IRS website has more information on how to file Form 2553.
While S corp classification comes with tax benefits for some businesses, making this election might not be right for every company. Have a chat with an experienced tax professional and carefully weigh the various pros and cons before deciding how you want to move forward.
The advantages of filing as an S corporation for an LLC aren’t the same as they are for C corporations. Let’s first examine the advantages for LLCs.
A traditional LLC already has pass-through taxation by default, so the benefits of federal S corporation election for an LLC have to do with the taxes for self-employment. This does take some explanation, but it could save certain LLCs a lot in those taxes.
The members of a regular LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC, meaning that they’re self-employed.
Being self-employed means you pay self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all the profits you receive from the LLC. That’s more than the taxes you’d pay when working for someone else because your employer would pay part of them.
But when the members file for S corporation election, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes 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.) Money paid out as salary is also a tax-deductible expense for the business.
An important stipulation to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If not for that requirement, you could pay yourself an annual salary of $7 and avoid contributing anything to Social Security and Medicare.
So, how does the IRS define “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t precisely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.
If the Internal Revenue Service determines that whatever salary you’re paying yourself isn’t enough, it has the authority to reclassify your non-wage distributions (which aren’t subject to employment taxes) to wages (which are subject to employment taxes). Court cases have supported the IRS’s right to do this.
Choosing S corporation status for your LLC can also have some drawbacks over a standard LLC:
S corporations have more conditions to meet than a standard LLC or corporation (as we listed above). S corp filing requirements say that you can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A standard LLC doesn’t have these limitations.
The IRS usually monitors LLCs filing as S corps more closely because of the above restrictions and the requirements about paying yourself a reasonable salary. That could mean a greater chance of being audited, even if you follow the law to the letter.
In fact, small business owners in an S corporation may want to observe some of the same formalities that corporations do (such as extensive record keeping), even if they’re not legally required to. It’s not necessary to appoint corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.
Having an LLC with an S corporation election generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, too.
These added complications could mean that you’ll have higher administrative costs because you may need to pay for payroll and accounting services.
If you have a C corp (the default form of corporation), filing as an S corporation has these advantages:
Traditional corporations have to deal with “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual shareholders as dividends, they’re taxed a second time on the shareholders’ personal tax returns.
But when a corporation qualifies to be an S corporation, those profits are only taxed at the individual shareholder level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
However, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as much now as they were.
Just as company profits pass through to the owners of an S corporation, so do the losses. Unlike the shareholders of a C corp, S corporation shareholders can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can help if the corporation loses money in its early years. However, make sure you’re aware of and understand the IRS’s shareholder loss limitations.
Under the 2017 Tax Cuts and Jobs Act, some S corporation owners may be able to deduct up to 20% of their qualified business income (QBI). This deduction isn’t available to C corp shareholders.
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 corporation election also has the following minuses:
As mentioned, an S corporation can’t have more than 100 shareholders, while a C corporation doesn’t have that restriction. This limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could become a problem if you want to expand internationally. You also can’t have partnerships or corporations as shareholders. Standard corporations don’t have these restrictions.
A common way corporations attract investors is to offer preferred stock. C corporations can legally do this, but the IRS doesn’t allow it for S corporations.
As with LLCs, the extra restrictions S corps often cause the IRS to watch them more closely to see if they’re in compliance. In other words, your corporation’s more likely to get audited.
We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corporation knowledge should be able to make sure you stay in compliance with the IRS. They may also be able to help you find additional ways to lower your tax bill.
In an S corporation, the business itself doesn’t usually pay federal income taxes; the individual owners pay personal income tax on the profits. But what about Indiana state income taxes?
Indiana treats businesses that file as an S corp for federal income tax purposes the same way when it comes to income tax from the state. That is, the same pass-through taxation that applies to federal income taxes applies to state income taxes. So, you shouldn’t have to worry about a separate Indiana S corp tax rate.
However, any S corporation doing business in Indiana and deriving gross income from sources within Indiana must file an annual Indiana S corp return, Form IT-20S, and the information return IN K-1 with the Indiana Department of Revenue, disclosing each shareholder’s share of distributed and undistributed income.
Some states require an S corporation to make a separate S corporation election at the state level, but Indiana doesn’t require that. If a company has a valid federal subchapter S corporation election, it will automatically become an Indiana S corporation.
Forming a Hoosier business with or without S corporation election can be complicated, but we’re here to make it easier. We can help you form an Indiana LLC with an S corporation designation and provide you with Indiana business resources and valuable support from our team of business experts. Contact us today to get started.
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Start Your S Corp in Indiana
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For a corporation, one of the biggest advantages is being able to avoid double taxation. Usually, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corporation’s profits are taxed only at the individual shareholder level.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the company’s profits and by being paid as an employee of the LLC. That permits them to only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to significant tax savings.
The regulations for naming your Indiana corporation or LLC isn’t related to your status as an S corp. Whether you file to be taxed as an S corp or not, your business remains an LLC or a corporation and follows the same Indiana business naming rules.
Indiana S-corporation election may not be right for all businesses. If you’re unsure about identifying your LLC as an S corp, consult with an experienced tax professional.
Calculating taxes can be challenging, but you can check out our S corp tax guide to learn more about taxes for your S corporation. A certified tax professional can give you more definitive information for your circumstances.
Unfortunately, no. At this time, our S corp service is only for applying for S corporation status when you form your LLC with us. We do offer plenty of other services to support your business, though.
The IRS’s website says you’ll be notified as to whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you must apply for S corp status within 75 days of the formation of your LLC or no more than 75 days after the beginning of the tax year in which the election will take effect. For an existing LLC, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business structure, but an S corp is only a special tax status. You can read more about LLC vs S corp on our LLC vs. S Corp page.
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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