Start an Ohio S Corp

Navigating the journey to establish an S corporation in Ohio can be a significant step towards achieving tax efficiency for your business. As a tax designation under Subchapter S of the Internal Revenue Code, an S corp status allows businesses to direct their income to shareholders, effectively bypassing the double taxation encountered by traditional C corporations. This feature is particularly advantageous for owners of a limited liability company (LLC) in Ohio, as it opens up the possibility for substantial savings on self-employment taxes. Opting for S corp status enables LLCs to distinguish between salary and profit distributions, with only the former subject to self-employment taxes.

This article will delve into the process of setting up an S corp in Ohio, focusing on the benefits, procedures, and essential considerations to help ensure your business fully capitalizes on the tax savings offered by this designation.

Ohio S Corp Filing Requirements

Not every LLC or C corporation is eligible to get the S corporation tax classification, so you’ll have to check if you qualify. To be an S corp, an LLC or corporation must: 

• Be a domestic corporation or limited liability company
• Offer only one class of stock
• Not be an ineligible corporation (financial institutions, insurance companies, and domestic international sales corporations)
• Have no more than 100 shareholders (corporation owners) or members (LLC owners)
• Have permitted shareholders only, typically individuals and certain trusts or estates.

As long as you meet those criteria, your business is eligible to elect S corporation status.

Considerations for Ohio S Corporation Taxes

If you’re operating an Ohio S corp, it’s essential to stay informed about state-specific tax policies. S corps are distinct in how they’re taxed, and Ohio has its nuances to bear in mind.

The primary consideration is the pass-through nature of the S corp. This means that the corporation itself isn’t taxed on its income at the federal level. Instead, the income, losses, deductions, and credits are passed directly to shareholders based on their percentage of ownership. While this eliminates double taxation, it’s essential to know how Ohio treats this income at the state level.

Ohio Income Tax

In Ohio, the pass-through taxation means that individual taxpayers will be subject to Ohio’s progressive individual income tax rates. This means the Ohio income tax rate applied varies depending on the income bracket the shareholder falls into based on their income for the calendar year from all sources. Staying updated on these brackets will help ensure accurate tax calculations; if need be, consult the Ohio Department of Taxation for the current rates.

Another point to remember is that while the S corp itself isn’t directly taxed on its income, it may still be subject to Ohio’s Commercial Activity Tax (CAT) if its gross receipts exceed a specific threshold. The CAT is a tax on gross receipts from doing business in Ohio, and while many smaller businesses might be exempt from these corporate taxes, it’s an essential consideration for larger enterprises.

In summary, while Ohio S corps offer potential tax advantages, it’s vital to be well-versed in the state’s tax landscape. Ensuring you understand both the state’s treatment of pass-through income and potential obligations from tax liabilities like the Commercial Activity Tax (or CAT, Ohio’s version of a franchise tax) will help keep your S corp compliant and running smoothly. For more guidance, consult the Ohio Department of Taxation.

How to Start an S Corp in Ohio

There are two primary areas to address when starting an S corp in Ohio: forming an LLC or corporation (provided you don’t already have one) and filing the election paperwork with the Internal Revenue Service (IRS).

Forming an Ohio LLC

1. Name your Ohio LLC
2. Appoint an Ohio statutory agent
3. File Form 610 Articles of Organization
4. Create an operating agreement
5. Apply for an EIN
6. Apply for S Corp status with IRS Form 2553

That’s just a snapshot of the process; for a more detailed explanation, check out our guide to start an Ohio LLC.

Forming an Ohio Corporation

1. Name your Ohio corporation
2. Appoint Directors
3. Choose a Ohio Statutory Agent
4. File the Ohio 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

Starting an Ohio corporation is a bit more involved than forming an LLC. If you’re interested, check out our Ohio incorporation guide.

Electing S Corporation Status by Filling Form 2553

Once your LLC or corporation is formally recognized by the state, you’re ready to file paperwork with the IRS. The form you’ll need is IRS Form 2553, Election by a Small Business Corporation. 

You have two options for when to file this form: 

• Within 75 days of forming your business or up to 75 days after the start of the tax year during which you wish to elect S corp status

OR

• At any time during the tax year before the year you want to begin S corp status

One quick disclaimer for LLCs: if more than 75 days have passed since you filed your formation paperwork, you’ll need to file Form 8832 in addition to Form 2553. Form 8832 is the Entity Classification Election form, which essentially tells the IRS that you want to be taxed like a C corporation. Thankfully, you can submit the two forms together and gain S corporation status for your LLC.

One last note: the election form contains a section where your shareholders or members sign to agree to the S corporation election. Be sure to have all those signatures ready when you submit. 

Keeping Your Ohio S Corp Compliant

Once your Ohio S corp is up and running, the journey doesn’t end there. Maintaining compliance is an ongoing task crucial to the health of your business. Regularly update your company records, hold and document annual shareholder meetings, and ensure timely submission of all required state and federal tax documents. Also, always be ready to adapt to changing tax laws and regulations. By staying proactive and organized, you’ll safeguard your S corp’s good standing in Ohio and reap its long-term benefits.

Pros and Cons of S Corp for an Ohio Limited Liability Company or Corporation

Just because you can make your LLC taxed as an S corp doesn’t mean it’s the right fit for your business. Let’s run through some of the pros and cons you should consider.

Advantages of S Corp Status for LLCs

LLCs benefit a little differently from S corp status than corporations. Let’s talk through what that means.

Self-Employment Taxes

Members of an LLC aren’t considered employees, so when they get income from the LLC, they have to pay self-employment taxes (Social Security and Medicare). Usually, in traditional employment settings, an employer pays half and the employee pays half. But with self-employment scenarios, each LLC member pays the whole employment tax burden. This adds up to roughly 15.3%. 

Dividing Salary and Profits

But thankfully, electing S corp status as an LLC can actually reduce the members’ self-employment tax burden. That’s because being an Ohio S corp status lets members pay themselves in two ways: part as an employee and part as member distributions. Since you only pay employment taxes on your salary portion, these tax advantages can add up to a significant benefit if your LLC generates enough income. 

Reasonable Compensation

There is a caveat, though: the IRS requires all members to pay themselves a “reasonable salary” each year. This prevents people from paying themselves a tiny salary and dodging employment taxes completely. What constitutes a reasonable salary is a little vague, but as long as you fall somewhere within average salaries for your industry, you should be compliant.

Pros of S Corp Status for C Corporations

Here are the perks of becoming an S corporation for a traditional corporation. 

Pass-Through Taxation

Income from traditional corporations is taxed on two levels: once at the business level and again when the shareholders receive distributions. This is commonly called double taxation. But when C corps elect S corp status, they avoid double taxation and change to pass-through taxation. With this structure, the corporation pays no tax at the business level. The income is taxed only once, when each shareholder reports their share of the income on their personal tax returns. 

Writing Off Business Losses

Members of an S corporation are actually allowed to deduct business losses on their personal tax returns, which can reduce their overall tax burden. C corporation shareholders can’t do this. 

Qualified Business Income Deduction

S corporations are allowed to take advantage of the Qualified Business Income Deduction (QBI). With this deduction, S corp shareholders are allowed to deduct 20% of their qualified income, or the income from the S corp, from their total income on personal taxes. C corporation shareholders can’t take this deduction.

For more information on what constitutes QBI, please check out the IRS resources. 

Disadvantages of S Corp Status for LLCs

There are, of course, drawbacks to electing S corporation status: 

Strict Requirements

Not all LLCs meet the IRS’s strict requirements for electing S corp status, such as having 100 members or fewer who can’t be corporations or partnerships or non-resident aliens. Standard LLCs don’t have to adhere to these restrictions. 

Additional IRS Scrutiny

Statistically speaking, S corporations are much more likely to be audited. The IRS wants to check that you’re paying yourself a reasonable salary each year.

More Accounting, More Bookkeeping

Taxes and bookkeeping get more complicated when you pay yourself as an owner-employee. You’ll have to keep very careful records. 

Cons of S Corp Status for C Corporations

There are some drawbacks to S corp status that you’ll want to evaluate carefully: 

Limited Number of Shareholders

If you’re hoping to be an S corporation, you can’t have more than 100 shareholders. 

Limited Types of Shareholders

S corporations can only be owned by U.S. residents and certain estates or trusts. If your shareholders include other business entities or an international reach, you can’t elect S corp status.

Only One Class of Stock

C corporations with more than one tier of stock are not permitted to elect S corp status. 

More IRS Scrutiny

S corporations are more likely to get audited. The IRS monitors S corporations more closely to ensure that they’re in compliance with the tax code.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

State and Federal Resources

If you’re looking for additional local support after you start your Ohio business, there are lots of resources available to you. The Small Business Development Center has an Ohio chapter, and so does the Small Business Administration. These organizations offer a wide variety of programs, including business coaching, funding opportunities, networking, advice for licenses from a government agency, and more. Ohio’s Business Resource Connection is another great place to start.

Get help establishing an Ohio LLC with S corp tax election

Embarking on your business journey in Ohio? Let us be your guide. Whether you’re still in the planning stages or you’ve already launched, securing an LLC with S corp designation can be a breeze with our expert assistance. We understand the nuances of the Ohio business landscape and have streamlined the S corporation formation process to make it as straightforward as possible. Even if you’re just getting started with your LLC or corporation or you need one of our other services, our team is here to ensure every step is simple and stress-free. Why navigate the complexities on your own? Trust in our expertise and let us help you pave the way for your business success in Ohio.