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Last Updated: 3/19/24

Starting an S corporation in Rhode Island could be a wise decision for business owners looking at tax-saving opportunities. An S corp is a tax designation that offers benefits primarily in the form of tax savings, making it an attractive option for many. This status is especially beneficial for owners of a limited liability company (LLC) in Rhode Island, as it can significantly impact how much they pay in self-employment taxes. Typically, the entire profit of an LLC is subject to these taxes. However, by choosing to be taxed as an S corp, owners have the flexibility to pay themselves a salary from the business’s profits. This strategy means that only the salary is subject to self-employment taxes, while any additional profits distributed as dividends are not.

This guide will walk you through the essentials of how to start an S corp in Rhode Island, focusing on how this decision can help ensure your business maximizes its tax advantages while complying with all legal requirements.

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.

Get help establishing a Rhode Island LLC with S corp tax election

While all this may seem overwhelming, we’re here to help. As you form your company and transform it into an S Corporation in Rhode Island, we can guide you through every step of the process. Whenever you form a new company, we can help you keep it running smoothly. If you need Business Plan, an EIN, or would like state compliance help with our Worry-Free Compliance Service, we are here to help.

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Rhode Island S Corporation FAQs

  • An S Corporation in Rhode Island is a pass-through tax entity. This means that the income from a Rhode Island S Corporation passes directly to its owners. Instead of having to pay an extra tax on corporate profits, S Corporation shareholders only need to pay income taxes when they file their own individual returns. Because an S Corp can only be an LLC or corporation, this means Rhode Island S Corporations also have limited liability. You shouldn’t be held personally responsible for any debts or liabilities of the business except in certain extreme cases.

  • S Corporations in Rhode Island combine personal liability protection with simplified, pass-through tax treatment.

  • Choosing a name for your corporation is easy with our Formation Services! Just make sure it’s compliant with Rhode Island law.

  • The IRS needs to know that your business is being taxed as an S Corp. But there isn’t any requirement that you indicate this status in your company’s name.

  • Taxes are generally paid by pass-through entities the same way as personal income. If you have questions, contact a qualified tax professional.

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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Written by Team ZenBusiness

Create Your S Corporation In Rhode Island