If you’re an entrepreneur in the Sooner State, starting an Oklahoma S corp could be a way to get some tax benefits. But how do you go about starting an S corp, and what is an S corp, anyway?
An S corporation (S corp for short) refers to a federal tax status; it’s not an actual business type. And so, an S corporation refers to either a limited liability company (LLC) or a corporation that’s made an S corp election. For a corporation, S corp election is a way to avoid double taxation. For an LLC, it’s a way to save on self-employment taxes.
Not every LLC or corporation will qualify to be an S corp, though; they must meet the Internal Revenue Service’s conditions first. We’ll outline those criteria and the steps you would need to take to file as an S corp if you decide that it’s right for you and your business.
We’ll explain more about S corps and how they affect your taxes later in this article.
For the Internal Revenue Service (IRS) to accept your application for S corp status, you must meet the filing requirements of the Internal Revenue Code. These requirements state that your business must:
If your business entity meets those conditions, you can apply for an S corp election.
To create an Oklahoma S corporation, you’ll need to form either an LLC or a C corporation (the default form of corporation) if you haven’t already. From there, you’ll file an election form with the IRS.
The first step in forming an LLC in Oklahoma is to choose a name for your business that’s unique to Oklahoma and follows the state’s naming guidelines. Next, designate an Oklahoma registered agent and file your Articles of Organization with the Oklahoma Secretary of State. Write an operating agreement for your LLC to clarify how it will be run and organized. Lastly, get an employer identification number (EIN) from the IRS. For more details on these steps, visit our “Start an Oklahoma LLC” page.
If you’d rather start an Oklahoma corporation for your S corp, follow the instructions on our Oklahoma corporation page.
When your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp designation.
The IRS requires you to complete and file your Form 2553:
One caveat for LLCs wishing 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 would file both Form 8832 and Form 2553 together via USPS-certified mail.
It’s important that all of the shareholders/members sign the consent statement portion of the form. For more information on filing Form 2553, visit the IRS website.
Register Your Business in Oklahoma as an S Corp
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In an S corp, the business itself doesn’t usually pay income taxes at the federal level, just the individual owners. But what about Oklahoma state income taxes?
If your company has a federal S corp election, Oklahoma will treat it the same way for state income tax purposes; that is, the S corporation itself won’t pay state income tax, just the business owners. However, Oklahoma S corporations must file Oklahoma Small Business Corporation Income and Franchise Tax Return Form 512-S.
Whether your S corp is an LLC or a corporation, you’ll need to perform certain ongoing tasks to keep them in compliance. If your S corp was organized as an LLC, you’ll need to file an annual certificate (referred to as an annual report in most states) every year and pay an accompanying filing fee. The purpose of the certificate is to keep the state updated on basic information about your business.
If your S corp was organized as a corporation, you’ll be required to file an Oklahoma Corporation Income Tax Return, whether or not you owe taxes. Oklahoma corporations must also file an Oklahoma Annual Franchise Tax Return. You have the option of filing a combined corporate income and franchise tax return.
Oklahoma corporations are also required to hold annual shareholder meetings at a time and place established in the bylaws, unless the directors are elected by written consent in lieu of an annual meeting. Keeping corporate records, including a stock transfer ledger, is another requirement for Oklahoma corporations.
These likely won’t be the only ongoing requirements for your Oklahoma S corp. For example, you may have business licenses that need to be renewed regularly. Seek legal guidance if you have questions.
While S corp status does come with tax benefits for some businesses, making this election might not be the best option for every company. Carefully consider the pros and cons before deciding how you want to proceed. Consult a tax professional about whether the S corp election would be best for your business.
If you have a C corporation, filing as an S corp has a few advantages:
One big downside to corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. And when those profits are distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.
When a C corporation qualifies to be an S corp, though, those profits are only taxed at the individual business owner level. The business itself isn’t taxed on them. This is called “pass-through taxation.”
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. C corporation shareholders can’t take this deduction.
Qualified business income (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).
Just as business profits pass through to the owners of an S corp, so do the company’s losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements.
S corp status has its minuses for C corps, too:
Because of the extra limitations S corps have, the IRS watches them more closely to see if they’re in compliance. That could mean a greater chance of being audited.
As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. You also can’t have corporations or partnerships as shareholders.
One way corporations attract investors is to offer preferred stock, but this isn’t allowed for S corps.
Having an S corp election brings a different set of strengths and weaknesses for an LLC.
The advantages of filing as an S corp for an LLC differ from the advantages for C corporations. A traditional LLC already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain more below.
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 company. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.
But when the members elect S corp status, they can receive money from the company in two ways, by receiving their share of the profits and by being employed by the LLC. Once they do that, they only pay taxes for Social Security and Medicare 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 and any other taxable income.) Note that money paid out as salary is a tax-deductible expense for the business.
However, the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.10 and avoid contributing anything to Social Security and Medicare.
So, what is “reasonable” compensation? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.
LLCs with S corp status can also have drawbacks, though:
Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely. In other words, there’s a greater chance of being audited.
S corps have more qualifying conditions than a standard LLC, such as having no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
Having an LLC that files as an S corporation usually 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 start. Your taxes will also be more complex.
To start an LLC with S corporation election in Oklahoma, follow these steps:
If you prefer to have a C corporation with S corp election, follow the instructions for forming a corporation and then file Form 2553.
No, Oklahoma doesn’t have provisions for a composite return.
Because an S corp in Oklahoma doesn’t pay federal or state income tax, the tax rate would be whatever the tax rate is for the business owner.
At the federal level, there’s no annual fee for an S corporation. If your S corp is organized as an LLC in Oklahoma, you’ll need to pay a $25 (as of this writing) fee for your annual certificate. If your S corp is organized as a corporation in Oklahoma, you’ll need to pay the franchise tax, which is levied and assessed at the rate of $1.25 per $1,000.00 on the amount of capital allocated or employed in Oklahoma.
An LLC is a separate legal business entity, but an S corp is a federal tax election that an LLC or corporation can file for.
A C corp is a separate legal business entity, but an S corp is a federal tax election that an LLC or corporation can file for.
For additional information about how S corps are treated in Oklahoma and other important tax info, see the Oklahoma Tax Commission website. The IRS website can also provide more information on the federal guidelines for S corporations. We recommend having a trusted tax professional by your side. They can guide you through legal and financial challenges so that you can stay in compliance while maximizing your tax savings.
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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