File a Rhode Island S Corp

S Corporation Limitations and Requirements

You must meet specific criteria before an LLC or Corporation may choose S Corp Status. The entity:

• May not have more than 100 owners
• Must be owned by U.S. residents, trusts, or estates
• Must have only one class of stock
• May not be an ineligible entity such as a financial institution or insurance company

If one of these requirements isn’t met, then you won’t be able to elect S Corporation status. An S Corp might not be the best option if you’re looking to bring in a lot of shareholders or foreign investors to join your business.

What to Know Before Creating an S Corporation in Rhode Island

An S Corporation is a good option for many business owners, but not all of them. It may be a good idea to evaluate the pros and cons of an S Corp to ensure it’s the right entity for you. You never know, a C corporation may be the better option. Again, as we mentioned earlier, when you create a corporation, it’s a C corporation by default. To convert to an S corp, you have to file Form 2553.

What is the Difference Between a Rhode Island S Corp and a C Corp?

One difference is that C Corporations can issue more shares of stock and create more classes of stock than an S Corporation. Though important, this isn’t really the biggest difference. The big difference between an S and C Corp has to do with taxes.

In Rhode Island, S Corporations are taxed as pass-through entities. A typical C Corp pays corporate income taxes on the income earned by the company. S Corporation owners pay taxes on the income as if it were their own income and not the entity’s income. An S Corp’s pass-through taxation simplifies taxes and helps prevent the burden of double taxation. 

Can LLCs Choose an S Corporation Election?

Yes! An LLC can also elect S Corporation status. Most LLCs that convert do so for tax reasons. As an owner of a limited liability company (LLC), you’re usually responsible for paying a self-employment tax on net earnings. However, if your entity is an S corporation, you may not owe any self-employment tax if you receive a reasonable salary from the company. However, S Corp status doesn’t eliminate Social Security and Medicare withholdings. If you’re interested in learning more about LLC tax issues, check out our article on the subject.

How to Form an S Corp in Rhode Island

Obtaining an S corp status is a bit different than creating a Rhode Island corporation or LLC. To create a Rhode Island S corp, you’ll first need to create a proper business entity — like a corporation or LLC — and then elect S corporation status. We can help you form a Rhode Island corporation or LLC with just a few easy steps:

S-Corp Election Steps for LLCs

For detailed formation steps, see our Rhode Island LLC formation guide.

• Step 1 – Choose a name
• Step 2 – Pick a registered agent
• Step 3 – Name directors or managers
• Step 4 – File RI Articles of Incorporation/Articles of Organization
• Step 5 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Rhode Island Corporation formation guide.

• Step 1 – Name Your Rhode Island Corporation
• Step 2 – Appoint Directors
• Step 3 – Choose a Rhode Island registered agent
• Step 4 – File the Rhode Island Articles of Incorporation
• Step 5 – Create Corporate Bylaws
• Step 6 – Draft a Shareholder Agreement
• Step 7 – Issue Shares of Stock
• Step 8 – Apply for Necessary Business Permits or Licenses
• Step 9 – File for an EIN and Review Tax Requirements
• Step 10 – Submit Your Corporation’s First Report
• Step 11 – Apply for S Corp status with IRS Form 2553

File Form 2553 to turn business into an S Corporation

For your entity to be converted into an S Corporation, you must file IRS Form 2553. In some cases, an LLC has to elect to be taxed as a corporation first by filing IRS Form 8832. The conversion to an S Corp can only be made at certain times. To convert an entity for the current tax year, the conversion must occur during the first two months of that year. After the initial two months, you may still be able to file Form 2553, though the conversion won’t take place until the next tax year.

Pros and Cons of Forming a Rhode Island S Corporation

Although there are benefits of having a C corporation, deciding whether a Rhode Island S corp is right for you depends largely on your preferences and needs. There are certain benefits of an S corporation.

Rhode Island S corp pros:

• Limited liability protects personal assets from business debts and liabilities
• Pass-through taxation can simplify the tax treatment of the business
• Avoidance of double taxation issues of C Corps and the self-employment taxes of LLCs

S Corps have their own downsides. The main cons of an S Corp include:

• More expensive and complicated than a sole proprietorship
• Ongoing maintenance requirements
• You could face tighter IRS scrutiny when you employ yourself through an S Corp

If you decide to create an S Corp, we’re happy to help you with the process.