Starting an S corporation (S corp) in Arkansas is easy, and electing an S corp tax designation could potentially save your business money in taxes. Our guide will walk you through the process of starting your Arkansas S corporation and provide you with tips on maintaining your S corp.
Want to form an S corp elsewhere? Check out our other How to Start an S corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Why an LLC Is the Best Structure for the S Corp Tax Status
As entrepreneurs, we believe that starting an LLC is the best way for forming an S corporation because any advantages of forming a corporation are negated by S corp restrictions. LLCs are also easier to maintain than corporations.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Arkansas S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form an Arkansas S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Arkansas
Starting an Arkansas LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Certificate of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Arkansas.
Be sure to choose a name that complies with Arkansas naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for an Arkansas LLC:
- Your name must contain the words “limited liability company” or “limited company” or the following abbreviations: L.L.C., L.C., LLC, or LC. The word “Limited” may be abbreviated as “Ltd.,” and the word “Company” may be abbreviated as “Co.”
- The name of an LLC that performs a professional service must contain the words "professional limited liability company" or "professional limited company" or the following abbreviations: P.L.L.C., P.L.C., PLLC, PLC.
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Your name must be distinguishable from any existing business in the state. This includes Arkansas reserved names.
You can also read the Arkansas state statute about LLC naming guidelines for more information.
2. Is the name available in Arkansas? You can use the business entity search on the Arkansas Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Arkansas Registered Agent
You must elect a registered agent for your Arkansas LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Certificate of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Arkansas LLC Certificate of Organization
The Arkansas Certificate of Organization is used to officially register an LLC.
OPTION 1: File Online With the Arkansas Secretary of State
- OR -
OPTION 2: File Form LL-01 by Mail or in Person
State Filing Cost: $50, payable to the Secretary of State. (Nonrefundable)
Arkansas Secretary of State
1401 W. Capitol Ave.
Little Rock, AR 72201
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Arkansas LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Arkansas S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Arkansas S Corp Compliant
Starting a business can be a lot of work, but once you’ve created a business and elected an S corps tax designation, it’s important that you follow federal and state laws to keep your business compliant. Arkansas has an Annual Franchise Tax Report that must be filed each year along with a flat-rate tax.
Arkansas Annual Franchise Tax
The Arkansas Franchise Corporate Tax Act states that all corporations and LLCs must file an Annual Franchise Tax Report. This tax is for the privilege of doing business in Arkansas. Since your S corporation is technically either an LLC or C corporation (depending on which structure you started with), your S corporation must file this report each year after the year of formation. Please note, even if your business does not make money or is not profitable in a given year, you still must file and pay the Arkansas annual franchise tax.
Register to File Taxes
Before filing your first Annual Franchise Tax Report, you must register with Arkansas’s Departement of Finance and Administration. All Arkansas businesses will need to complete this registration process.
File the Annual Franchise Tax Report
The Annual Franchise Tax Report is due each year by May 1st. Your first report will be due the year after formation. So if your business was officially formed in October of 2022, you will need to file an Annual Franchise Tax Report by May 1st of 2023. The tax rate varies based on your reported portion of the S corp’s profits, but most business owners can expect to pay a minimum of $150, and the form and fees can be filed online with the Arkansas Secretary of State.
Arkansas S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Arkansas S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Arkansas Income Taxes
Arkansas has a gradual income tax, so similarly to the federal income tax, state income taxes in Arkansas depend on your income. The income tax rate can range from 2% to close to 6%. Given that some states have an income tax rate of 0% and other states have an income tax rate close to 10%, Arkansas’s income tax rate places it squarely in the middle when compared to other states.
Arkansas Sales Tax
Arkansas has a 6.5% state sales tax rate, and many local areas have their own sales tax rate in addition to this. After forming your business, you will need to obtain a Sales Tax ID Number from the Department of Finance and Administration to ensure that you properly pay any Sales Tax.
Additional State Taxes
Arkansas’s Departement of Finance and Administration handles numerous miscellaneous Arkansas taxes.
Here are some examples of taxes business owners may have to pay in Arkansas:
- Alcohol tax
- Fantasy sports taxes
- Gambling tax
- Tobacco tax
- Natural Resources tax
Arkansas Local Taxes
It is best to verify your tax obligations with your local government. Whether your business is in Little Rock, Fayetteville, or another city, every place has their own local laws and rules to abide by.
Start an S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.