If you’re running your own business or planning to start one, you might hear about the tax benefits of an S corporation (S corp). “S corporation” doesn’t refer to a type of business entity, but rather a tax status. If you’re wondering how to set up your company as a North Carolina S corp, let this article guide you.
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 on our “What Is an S Corporation?” page.
As we mentioned, an S corp isn’t a separate legal business entity or business structure. Instead, it’s a tax classification that either an LLC or a corporation can apply for with the IRS if it meets the necessary criteria. In this article, 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 North Carolina 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 decide on setting up your business as an S corp, know that S corporations have some filing requirements and limitations. According to the Internal Revenue Code, 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 North Carolina.
To start a North Carolina 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.
If you’re ready to learn about filing as an S corp in North Carolina now, we’ll walk you through the steps. First, we’ll show you how to form an LLC in North Carolina. If instead you’d rather form a North Carolina corporation, follow the instructions on our North Carolina corporation page. Afterward, meet us in Step 6, and we’ll show you how to file for S corp tax treatment as either an LLC or corporation.
First, choose a name for your LLC. Of course, you can’t just pick any name; it has to be unique within the state of North Carolina. It also has to follow the North Carolina business naming guidelines.
It’s important to find an available business name that’s in line with North Carolina law. Otherwise, your paperwork could be rejected, and you’ll have to start the process over. Brainstorm business names until you come up with a short list of favorites so you’ll have options if your first choice isn’t available.
You must follow the legal requirements for business names in North Carolina. For example, the name can’t contain language that:
The following words can only be used if you can prove that you’re legally qualified to perform the implied professional services:
If you intend to operate as a wholesale business, you can use “wholesale” in your LLC’s name. You’ll have to submit a letter with your North Carolina LLC Articles of Organization to explain how you’ll comply with North Carolina wholesale business laws. Depending on the type of wholesale business, you may need to apply for a local or state business license.
“Bank,” “banker,” “banking,” “cooperative,” “co-op,” “mutual,” and “trust” are off-limits, too. State law forbids banking institutions from forming LLCs. If there are prohibited words you’d like to use in your name, you can receive permission to do so by applying to the proper legal authority. If the state approves your request, then you can reserve the name to use at a later date.
Those words or abbreviations (for example, “Inc.”) you sometimes see after a business name are called “designators.” They indicate what kind of legal business entity a company is. In North Carolina, LLCs are required to have one after their name.
North Carolina law states that the name MUST end with one of the following phrases or abbreviations:
To find out if the name you want to use is available, consult our North Carolina business name search page. The North Carolina Secretary of State’s office also suggests the following:
Even if your business name is technically different from another, North Carolina law says it must be “distinguishable.” So, if the only differences are articles, conjunctions, prepositions, punctuation, spaces, and the substitution of an Arabic numeral for a word, that’s not enough to make it distinguishable from another name.
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 feeling stuck about finding the right name, we offer some pointers on our “How to Name Your LLC” page.
Did you find an available name you love, but you’re nervous about someone else nabbing it before you can file your LLC paperwork? North Carolina allows you to reserve a business name for 120 days for a fee.
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Select a registered agent in North Carolina. By law, limited liability companies must appoint and keep a registered agent. This refers to an individual or business entity that’s responsible for accepting important official notices, such as subpoenas, in person and forwarding them to the business owner.
Under state law, the agent must be either a North Carolina resident with a street address in the state or a business entity authorized to do business in North Carolina (N.C.G.S. § 55D-30). The place where the agent accepts notices is called the registered office, and it must be a physical address in North Carolina.
You can’t use a P.O. box or something similar for the registered office. A process server must be able to deliver notice of a lawsuit in person.
You may think that you want to hold this position yourself, but it can end up being a pain. The agent is required to be at the designated office during all normal business hours to receive service of process in person. In addition, being served with a lawsuit in front of clients can be bad for business.
Using a registered agent service like ours can alleviate these problems. If you’re ever served notice of a lawsuit, you’ll know that someone will be available to receive it. That eliminates the worry of being out of compliance. Registered agent services also help ensure that a potentially embarrassing event like that will happen at a registered office away from your main place of business.
File your Articles of Organization with the North Carolina Secretary of State. Once the state approves this document, your LLC will be officially created.
Filling out and filing official paperwork is intimidating for many first-time business owners. That’s where we come in. With our business formation service, you’ll have our team of business experts to handle this critical filing for you to make sure it’s done correctly the first time.
Still, we’ll walk you through the process of completing the North Carolina Articles of Organization below.
To complete the Articles of Organization, you’ll need to gather the following information. Bear in mind that any info in the Articles will become public record:
After receiving your North Carolina LLC Articles of Organization, the Business Registration Division of the North Carolina Secretary of State Office will then review your application for approval or denial.
All those listed as executing the Articles of Organization are to be marked as a member, an organizer, or both. They must all sign and date the document, too.
There are three ways to file your cover letter and Articles of Organization with the state. These are:
Regardless of how you file, you’ll need to pay a filing fee of $128.
It’s recommended that you include a cover letter with your documents. You can download a form for the cover letter on the forms section of the North Carolina Secretary of State website. It’s a simple step that helps the filing process go much smoother.
Draft an operating agreement for your North Carolina LLC. An operating agreement (OA) allows you to establish the rules for how your LLC will operate and other important factors. North Carolina doesn’t legally require you to put an OA together, but having one is extremely important for making your LLC run smoothly.
If drafting more business documents while creating an LLC in North Carolina sounds like a dull chore, then you might reconsider after finding out the benefits of having an OA.
A few common ones include:
Here are some common elements you may want to include in your OA:
If you want to create an operating agreement but aren’t sure how to get started, we offer a customizable template to help.
Get an Employer Identification Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number or Federal Employer ID Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
We can obtain this number for you with our EIN service.
Speaking of taxation, don’t forget about state taxes. To pay state taxes for your business, you must register with the North Carolina Department of Revenue and receive a tax account ID number. You’ll need this number for income tax withholding, sales and use tax, and other taxes.
There’s no fee to submit your business registration application online. You can also file Form NC-BR for free in person or by mail.
Complete and submit the form to apply for S corp tax election. Once your LLC or C corporation formation is approved by North Carolina, 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 that you complete and file your Form 2553:
There’s a caveat 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. For more information on how to file Form 2553, visit the IRS website.
While S corp classification does come with a number of 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. First, let’s look at 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 standard 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. This is more than the taxes you’d pay when working for someone else because your employer would pay part of them.
But when the members make an 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 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 they didn’t, you could pay yourself an annual salary of $11 and avoid contributing anything to Social Security and Medicare.
So, how is “reasonable compensation” defined by the IRS? 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.
Having an LLC with S corporation status can also have some drawbacks over a regular LLC:
S corporations have more qualifications 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.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS usually monitors LLCs filing as S corps more closely. 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.
With these added complications, it’s possible 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:
One major disadvantage for traditional corporations is “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 severe 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 be helpful 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 limitations.
A common way corporations attract investors is to offer preferred stock. That’s okay for C corporations, but the IRS doesn’t allow it for S corporations.
As with LLCs, the extra restrictions S corps have 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 North Carolina state income taxes?
North Carolina 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.
However, North Carolina S corporations must still pay the state’s franchise tax. As of this writing (2023), the franchise tax rate for S corporations is $200 for the first $1,000,000 of the corporation’s tax base and $1.50 per $1,000 of its tax base that exceeds $1,000,000.
Some states require an S corporation to make a separate S corporation election at the state level, but North Carolina doesn’t require that. If a company has a valid federal subchapter S corporation election, it will automatically become a North Carolina S corporation.
Forming a business with or without S corporation election can be complicated, but we’re here to make it easier. We can help you form a North Carolina limited liability company with an S corporation designation and provide you with valuable support from our team of business experts. Contact us today to get started.
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Start Your S Corp in North Carolina
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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. Once they do that, they 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 naming process for your North Carolina 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 North Carolina business naming rules.
North Carolina 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 navigating taxes for your North Carolina S corporation. A certified tax professional can give you more definitive information for your circumstances.
Sorry, 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 of 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 entity type, but an S corp is only a special tax status. You can read more about LLC vs S corp in North Carolina 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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