If you feel that partnership is too informal and a C corporation is too clumsy for your business model, perhaps an S corporation (S Corp) is right for you. An S Corp is designed for small businesses and can both generate investment capital through stock sales and also offer a reduced tax profile. So what is a standard S Corporation and how do you create one?

First, know that an S Corporation is not a standalone entity like a C corporation or limited liability company (LLC). Rather, it is a federal tax election under the IRS. Its primary IRS benefit is conferring various beneficial tax treatments on its shareholders such as pass-through income which the shareholders then address at their personal income tax rate. Of course, there is more to S Corps than just tax benefits, and we encourage you to read further on our S Corporation information page. In this guide, we discuss the various aspects of an S Corp and how to set one up.

The first thing you need to know before starting a Wisconsin S Corp is how to create a business in general. We make that simple using our Wisconsin LLC Formation Service and our Wisconsin Corporation Formation Service. Setting up a C Corp or LLC as the foundational entity for your Wisconsin S Corporation is the first step. Once that is established we offer continuing support with our various business development and maintenance services. 

Step 1: Choose a name 

Choose a name that will last for the life of your business. Also, we suggest you pick a name that is both professional and also gives the public an idea about what you do (e.g., Wisconsin Lake Surveying Services, Inc.). Keep in mind that you will need to choose a name that is not already in use by another entity in the state.

Step 2: Select a registered agent

Wisconsin state law requires all businesses to have a registered agent. A registered agent receives official papers on behalf of your company such as service of process.

Step 3: Appoint a Director or Managers 

Next, you need to appoint people to run your S Corp, which can either be initial directors (corporation) or managers (LLC). You can do this through a written company resolution, which should come from the founders/incorporators.

Step 4: File Articles of Incorporation/Organization with the Wisconsin Department of Financial Institutions

The next step is to register your foundational entity with the state. To do so, you’ll need to file Articles of Incorporation for your C Corp or Articles of Organization for your LLC with the DFI.

Step 5: File Form 2553 to turn business into an S Corporation

Finally, you’ll file Form 2553 with the Internal Revenue Service (IRS). This is the most important step to create an S Corp. This form makes your C Corp or LLC into a Wisconsin S Corporation. If an LLC is your foundational entity, you first need to make a tax election with the IRS and possibly the Wisconsin Department of Revenue to treat it as a corporation.

What to know before creating an S Corporation in Wisconsin

Unless you file the right paperwork with the IRS to make your entity an S Corporation, it will be subject to default taxation rules. For a corporation, that means it will be taxed as a C Corp. An LLC will be taxed as either a sole proprietorship or a partnership depending on the number of members.

What is an S Corporation?

At their essence, S Corporations are small corporations that have several restrictions on shares and shareholders but also grant pass-through taxation to their shareholders and therefore do not pay corporate income tax themselves. 

What’s the difference between an S Corporation and a C Corporation?

C Corps have a virtually unrestricted ability to issue more shares and classes of stock than an S Corporation. As you saw above, S Corps have significant restrictions on shares and shareholders. However, the biggest difference between C Corps and S Corps, and equally the biggest draw, is how S Corporations deal with corporate income.

While C Corporations pay taxes on corporate income and then each shareholder has to pay taxes on their income from the corporation (i.e., double taxation), S corporations avoid this problem with pass-through taxation. That means they pass through their income to shareholders so only the shareholders have to pay taxes on the Wisconsin S Corp’s income. 

What are the requirements to create an S Corporation? 

To set up an S Corporation in Wisconsin you first must form a business with the DFI and then file form 2553 with the IRS. 

Even though S Corps are straightforward small business vehicles, the IRS still requires you to fulfill specific requirements to validly create an S Corporation in Wisconsin. The IRS requirements are:

• Be a domestic corporation or other eligible entity
• Have only certain kinds of corporate shareholders, including individuals, estates, exempt organizations, and certain trusts, but not partnerships, corporations, or non-resident immigrants
• Have no more than 100 shareholders
• Have no more than one class of stock
• Not be an ineligible corporation such as an insurance company, international sales corporation, or a certain kind of financial institution

These are some pretty limiting requirements. If you think, based on the above, that a Wisconsin S Corp may not be right for you, check with your legal and financial professionals to see if they think the S Corp fits your long-term business model. 

Can LLCs choose an S Corporation election?

Yes, LLCs can elect S Corp designation. Even though LLCs are simple and dynamic, they still can benefit from S Corp status.  This usually is because S Corps have an advantage in employment taxes over LLCs. Learn more about LLCs and taxation on our Tax Information for Limited Liability Companies page. 

Pros and Cons of Creating an S Corporation

Because S Corps are very specific in their purposes, we have created a list below with some pros and cons to help you weigh your decision. 

Pros

Running a Wisconsin S Corporation can be beneficial in many ways, such as:

• Protecting your personal assets
• Eliminating corporate double taxation
• Allowing you to use the cash method of accounting

S corporations are an excellent choice if tax liability is one of your biggest concerns.

Cons

Of course, there can also be drawbacks to a Wisconsin S Corp, such as:

• Additional expenses for formation and maintenance
• Restrictions on issuing shares
• More extensive IRS oversight
• More stringent eligibility requirements

After reading the above, if you are now on the fence about forming an S Corp, we encourage you to speak to your tax and/or legal professional to determine if these factors are significant given your circumstances.  

How We Can Help

We can help you form a Wisconsin S Corp quickly and easily with our S Corporation Service. We also offer ongoing business support, so you can continue to look to us to assist with the maintenance or compliance needs of your enterprise. 

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.