Embarking on the journey of establishing an Ohio S corp can open doors to numerous advantages for your budding enterprise. An Ohio S corporation offers potential (and sometimes substantial) tax benefits that many entrepreneurs find helpful.
Yet, how do you navigate the process, and what are the essentials you need to be aware of? This guide is here to break down the steps and provide insights into Ohio S corporation filing requirements and tips to get you started with confidence.
An Ohio S corporation isn’t a new or separate business structure — think of it more as a special tax status set up by subchapter S of the Internal Revenue Code. A qualifying limited liability company (LLC) or corporation can elect to be treated as an S corporation for federal tax purposes. While the term “S corp” might imply it’s a type of corporation, it’s essentially a tax designation granted by the IRS that modifies how a business is taxed.
So, why do many Ohio businesses lean towards this tax status? The benefits can be enticing:
If you’re not sure whether S corporation status is right for you, we highly recommend consulting with a tax professional to get customized guidance.
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:
As long as you meet those criteria, your business is eligible to elect S corporation status.
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).
To start an Ohio LLC, you’ll start out by creating a business name that’s unique and complies with Ohio naming laws. Then you’ll need to select an Ohio statutory agent and file your Articles of Organization. After that, it’s highly recommended to draft an operating agreement to govern your operations. Finally, get an Employer Identification Number (EIN; it’s like a Social Security number for a business) and open a business bank account.
That’s just a snapshot of the process; for a more detailed explanation, check out our guide to start an Ohio LLC.
Starting an Ohio corporation is a bit more involved than forming an LLC. If you’re interested, check out our Ohio incorporation guide.
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:
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.
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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.
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.
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.
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.
LLCs benefit a little differently from S corp status than corporations. Let’s talk through what that means.
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%.
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.
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.
There are, of course, drawbacks to electing S corporation status:
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.
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.
Taxes and bookkeeping get more complicated when you pay yourself as an owner-employee. You’ll have to keep very careful records.
S corp status isn’t right for every corporation. Here are some advantages and disadvantages you should evaluate.
Here are the perks of becoming an S corporation for a traditional corporation.
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.
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.
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.
There are some drawbacks to S corp status that you’ll want to evaluate carefully:
If you’re hoping to be an S corporation, you can’t have more than 100 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.
C corporations with more than one tier of stock are not permitted to elect S corp status.
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.
No, Ohio doesn’t levy a specific S corp tax. Instead, Ohio follows the federal model for S corps, where the corporate income or loss is passed through to the shareholders. The shareholders then report this on their individual state tax returns and pay any Ohio personal income tax due on those amounts. That said, all state businesses, including S corps, might be subject to Ohio’s Commercial Activity Tax (CAT) based on their gross receipts.
To establish an S corp in Ohio, you start by forming a corporation or LLC with the Ohio Secretary of State. After formation, you then apply to the IRS for S corp tax treatment by filing IRS Form 2553. It’s essential to ensure you meet all eligibility criteria for an S corp and to file the form timely to receive this special tax designation.
In Ohio, an LLC is a legal business structure that provides its owners with limited liability protection for their personal assets. It’s flexible in terms of management and profit distribution. An S corp, on the other hand, is a tax designation that can be chosen by an LLC or C corp. It allows for pass-through taxation, where the company’s income or loss is reported on individual shareholders’ tax returns. So, while an LLC refers to a type of business entity, an S corp refers to a tax classification.
Form 1120S is a federal tax form used by S corporations to report their income, gains, losses, deductions, and credits. Ohio doesn’t have its own version of the 1120S, but S corporations in Ohio are required to file specific state tax forms depending on their activities and income. Many business owners choose to hire tax professionals to ensure proper state tax filings.
Yes, Ohio recognizes the S corp election of qualifying businesses. While the S corp tax status is federally granted, many states, including Ohio, acknowledge this status for state tax purposes. As a result, S corps in Ohio benefit from the pass-through taxation model, and shareholders report their share of the company’s taxable income on their individual state tax returns.
The cost to establish an S corp in Ohio involves a few different fees. First, there’s the fee for filing the Articles of Incorporation (or Articles of Organization for an LLC) with the Ohio Secretary of State. As of this writing, this filing fee is $99, but it’s wise to check the current rate on the Secretary of State’s website or contact their office. If you’re opting for S corp tax status, there’s no fee to file Form 2553 with the IRS. There might be additional costs for professional services or state-specific requirements, so it’s good practice to budget for these and stay updated on the latest fee structures.
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.
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.
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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