The islands of Hawaii have a lot to offer residents and visitors alike, including a tropical climate, picturesque beaches, and a serene lifestyle. The “Aloha State” also has a booming tourism industry in which small businesses of all kinds can find success.
If you plan to start a business in Hawaii, choosing how to structure it doesn’t have to be complicated. By forming an S corporation (S corp) in Hawaii, you can save money in taxes and enjoy other operational benefits. Read on to learn all the steps you must take to form your Hawaiian S corp. This guide also shares tips to help you ensure your business complies with all state laws and guidelines.
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 Northwest to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Hawaii
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.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (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 Hawaii 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 a Hawaii S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the Internal Revenue Service (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 Hawaii
Starting a Hawaii 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 Northwest 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 Articles 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 Hawaii.
Be sure to choose a name that complies with Hawaii naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Hawaii LLC:
Your name must include the phrase “limited liability company,” or one of its abbreviations (LLC or L.L.C.). "Limited" and “company” may be abbreviated as "Ltd." and "Co.," respectively.
Your name cannot be the same as or substantially identical to any existing business or trademark registered in the state.
Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
The following terms cannot be used without approval from the state commissioner of financial institutions: financial institution, bank, banker, banking, banc, savings bank, savings and loan, savings association, financial services loan company, credit union, trust company, intrapacific bank, international banking corporation, and trust.
Domestic insurance corporations must include the word "insurance" in their name; and in the case of a reciprocal insurer, the name must include one of the following words: reciprocal, interinsurer, interinsurance, exchange, underwriters, or underwriting.
Use of the following terms also requires state approval or certification: certified public accountant, public accountant, CPA, PA, cooperative, escrow, and escrow depository.
Your name must be permitted by law and not attempt to mislead or confuse the general public.
You can also read the Hawaii state statute about LLC naming guidelines for more information.
2. Is the name available in Hawaii? You can use the business name search on the Hawaii Business Express 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 Hawaii Registered Agent
You must elect a registered agent for your Hawaii 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 Formation.
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 Hawaii LLC Articles of Organization
The Hawaii Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With Hawaii Business Express
- OR -
OPTION 2: File Form LLC-1 by Mail, by Email, by Fax, or in Person
State Filing Cost: $50 nonrefundable filing fee + $1 refundable State Archive Fee, payable to the State of Hawaii
Department of Commerce and Consumer Affairs
Business Registration Division
335 Merchant St.
PO Box 40
Honolulu, HI 96810
Department of Commerce and Consumer Affairs
335 Merchant St., Room 201
Honolulu, HI 96813
Fax: (808) 586-2733
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 Hawaii 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 Hawaii S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Hawaii S Corp Compliant
Once you elect the S corporation tax designation for your business, you’ll need to make sure you follow Hawaii state and local laws to keep your business in good standing. All businesses in Hawaii must file an annual report and pay state taxes. Some businesses also may need to obtain local permits.
Hawaii S Corp Annual Report
All Hawaii businesses, including your LLC with S corp status, need to file an annual report with the Hawaii Department of Commerce and Consumer Affairs. This report informs the state of any changes in your business’s address or registered agent information. Even if your business doesn’t undergo any changes from year to year, you must still file an annual report or risk having the state dissolve your business.
Visit our Hawaii Annual Report guide for a step-by-step filing overview.
Hawaii 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 Hawaii 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.
Hawaii Income Taxes
Hawaii has a graduated state income tax, which means your income tax rate will change based on your income level. Hawaii’s state income tax rates range from 1% to 11%.
Compared to people in other states, Hawaiian residents who fall into the state’s higher income tax brackets will pay significantly more in taxes. This can make Hawaii’s state income tax rather expensive.
Register for a Hawaii Tax ID Number
After forming your business, you’ll need to register for a Hawaii tax ID number. You’ll use this number to identify your Hawaii tax account and obtain any required state tax licenses.
Hawaii General Excise Tax
Rather than a sales tax, Hawaii has a general excise tax that ranges from 0.5% to 4.5%. This is a tax on your business’s gross income. Most businesses treat this like a sales tax and pass the additional cost on to consumers.
Depending on your business’s revenue and resulting general excise tax obligation, that state may require you to pay this tax monthly, quarterly, or every six months. Visit the Hawaii Department of Taxation website for more information.
Additional State Taxes
Depending on your business’s industry, location, and number of employees, the Hawaii Department of Taxation may require you to pay additional state-specific taxes. Some examples of these additional taxes include:
- Liquor Tax
- Tour Vehicle Tax
- Transient Accommodations Tax
- Car-Sharing Vehicle Tax
- Fuel Tax
- Cigarette and Tobacco Tax
Visit the Hawaii Department of Taxation website for more information.
Hawaii Local Taxes
Regardless of whether you locate your business on Maui or Oahu, each local jurisdiction may have its own laws and regulations. Check with your local government to ensure your business remains in good standing with local laws.
Start a Hawaii S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
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.
What types of businesses can elect S corp status in Hawaii?
While Hawaii’s primary industry is tourism, it’s also home to other supporting industries like the arts, food service, entertainment, recreation, and more. Whether you plan to open a food truck, offer tours, or provide cleaning services, you can form your S corp in Hawaii within just about any industry. Just make sure you meet the IRS’s minimum requirements for an S corp.
Is Hawaii a good state in which to form an S corp?
The best place for you to start your business and elect S corp status for it will be where you plan to base your operations. When it comes to the benefits of forming an S corp, Hawaii offers entrepreneurs an attractive business climate and a thriving economy sure to boost their chances of success.