Last Updated: June 10, 2024, 9:41 am by TRUiC Team


How to Start an S Corp for my Landscaping Company

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your landscaping company save money on its taxes. Landscapers work hard to beautify their clients’ lawns and properties. Professional landscaping can make a home or office seem luxurious to passersby. 

Whether your landscaping company is fairly new or has been around for many years, electing S corp status can potentially save you thousands of dollars each year.

Recommended: Save yourself the hassle and use a professional service like ZenBusiness to help you handle the initial S corp election paperwork.

Woman in greenhouse with a phone and computer.

What Is an S Corporation?

An S corporation (S corp), also known as Subchapter S, is a tax status with strict IRS requirements and restrictions. If your business meets the requirements to be taxed as an S corporation, you will be eligible for certain tax benefits such as pass-through taxation and self-employment tax savings, which can be significant. 

Essentially, an S corporation provides the perfect opportunity for business owners to have both the benefits of a default LLC with pass-through taxation and some of the perks of a C corporation without the dreaded double taxation.

S Corp Requirements

In order to be taxed as an S corporation, your landscaping company must meet the following requirements:

  • Has 100 shareholders or less
  • Is a domestic LLC or corporation
  • Issues only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Is owned by private individuals

What Type of Business Structures Can Start an S Corp?

An S corp designation can be elected by a formal business structure, specifically an LLC or a corporation. Informal business structures such as sole proprietorships and partnerships are not eligible for the S corporation classification. 

How to Start an LLC Tip Icon

Don’t have a formal business structure? If your landscaping company isn’t currently an LLC or C corporation, our friends at ZenBusiness can form your legal business entity for you and elect S corp tax status in no time.

S Corp Tax Benefits Landscapers Should Know About

S corporations enjoy certain tax benefits, such as pass-through taxation (all losses and profit — credits, distributions, deductions — pass directly to the owner). This is similar to how default LLCs are taxed. With pass-through taxation, all profits bypass the company and go directly to the owners, and owners pay on their personal tax return at their regular income tax rate.

Default LLC Taxes Explained

Business owners of default LLCs pay self-employment taxes and income tax on the distributions passed down to them. In other words, both types of taxes are imposed on all the money they receive after paying business expenses. Self-employment taxes include social security and medicare, and these two taxes.

S Corp Taxes Simplified

With an S corporation, owners are classified as employees and are paid in two ways: a salary and distributions.

Reasonable Salary

Since owners are employees, they must receive a salary, and therefore they must run payroll. Business owners pay self-employment taxes and income tax on their salaries. To qualify as an S corporation, the company owner must pay themselves a “reasonable” salary — the equivalent of what someone else doing the same work would earn. Online resources like Glassdoor and the US Bureau of Labor Statistics can help you find pay averages and ranges to help you determine your reasonable salary.

The average salary of a landscaper in the United States is $39,647, according to Glassdoor. This can vary, however, based on your experience and location. Remember to consider these factors in your research so you can choose the right salary for you and your business.

Distributions

Unlike the reasonable salary, the owner only pays income tax on the distributions. This means the business owner does not pay the self-employment tax of 15.3% on money taken as a distribution.

When Should a Landscaper Elect S Corp Status for a Business?

This is a subjective question and will depend on your business and your goals. You need to be sure to take enough money in distributions to benefit from the advantages offered by an S corporation and offset the additional paperwork and fee associated with running payroll. In general, you will likely benefit from S corp status once your business makes at least $60,000 in earnings and $20,000 in annual distributions. These numbers are after paying business expenses. The IRS requires S corp owners to pay themselves a reasonable salary to ensure they aren’t lowering their compensation to avoid paying more on taxes — which would lead to loss of S corp status, fines, and even business dissolution.

Use our S Corp Tax Calculator to find out if an S corp is right for your business. Calculate your savings below:

S Corp Savings Calculator

Calculate how much you can save by choosing an S Corp tax classification

Recommended:

Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Get your S corp started today with ZenBusiness.

Six Basic Steps to Start an LLC and Elect S Corp Status:

  • Step 1: Select a State
  • Step 2: Name Your LLC
  • Step 3: Choose a Registered Agent
  • Step 4: File the Articles of Organization
  • Step 5: Create an Operating Agreement
  • Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Select Your State

Step 2: Name Your LLC

If you don’t already have a business, you will first need to form one. You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLC’s formation documents.

Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.

Step 3: Choose an LLC Registered Agent

Your S corp registered agent will accept legal documents and tax notices on your business's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 6: 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.

Steps to Take After Starting an S Corp

Once you formalize your S corp, be sure to get your financials in line so you are ready to begin operating.

For business banking, check out our guide on the best banks for small businesses.

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through Divvy.

Recommended: You’ve worked hard and deserve a break! If you make at least $20,000 in distributions, let ZenBusiness start your S corp, so you can focus on your business.

Landscaping Company Information

Landscapers handle the lawn care needs of their clients (e.g., gardening, mowing, weeding, and other tasks) to keep their properties looking beautiful and inviting. They may even do some installation work, such as setting up outdoor lighting systems or sprinkler networks. 

While demand for landscapers exists everywhere, a large portion of them work in dry, southern states where lawns may need more specialized maintenance. As of January 2023, the United States had nearly 647,000 active landscaping companies.

Why Most Landscaping Companies Should Have a Legal Business Entity

Liability protection is the most important reason landscaping companies become legal business entities. With a formal business structure, these companies can safeguard their employees’ assets if a third party ever sues them. 

For example, let’s say water seeps into the basement of a client’s house after a line breaks within a sprinkler system you set up. The client tries to sue you for the water damage. If this lawsuit moves forward, the client could only take your business to court — not you as an individual.

Legal business entities also enjoy enhanced legitimacy. When it comes time to hire a landscaper for their lawn care needs, clients are more likely to choose a company with a formal business structure because they seem more professional.

Is an S Corp Right for My Landscaping Company?

In order to determine if electing S corp status is right for your landscaping company, you must consider several key factors. 

First, an S corp must run payroll for all of its employees – including its owner(s). Businesses that can’t afford the accounting fees associated with running payroll won’t find S corp status advantageous. But, this requirement doesn’t pose an issue for businesses that already run payroll. Consider if the cost of payroll will be worth the tax savings your business can achieve as an S corp.

Second, you also need to consider how many shareholders your business will have. Companies can’t exceed 100 shareholders if they want to qualify for S corp status. You may have no problem with this limit, but, if you think you might exceed it, you’ll fare better having the IRS tax your business as a C corp vs. an S corp.

Lastly, you must think about the required distribution from your business’s net profits. S corp owners must take a distribution from their company in addition to their reasonable salary. To fully benefit from S corp status, you should take a distribution of at least $10,000. Some businesses would rather put that money back into their operations, which would make an S corp unobtainable. Businesses in that situation should instead choose to be taxed as LLCs.

Landscaper S Corporation Examples

Not all landscaping companies will benefit from electing S corp status. Here are two examples to help illustrate which types of landscapers may find this tax designation advantageous.

Scenario 1:

Imagine you run a landscaping company in Texas near a large city. You started this business five years ago and now have several companies as clients. Currently, you do landscaping for a gated community and an office complex, handling the property for each of the six businesses inside. 

You already pay a service to run payroll for all 12 of your employees, including yourself. While you don’t have too many shareholders, three of the offices for which you work bought multiple shares in your business. You feel comfortable with how many investors you currently have. 

This landscaping company is a good candidate for becoming an S corp. Because you have a lock on your shareholders and already run payroll, the only major concerns will include establishing your reasonable salary and deciding how large a distribution to take.

Scenario 2:

Now, let’s say you run a small landscaping business that launched last year. You have four employees, including yourself, and you started running payroll when you hired the others. Your clients include 15 residential properties within 20 miles of your business, which operates out of your garage. Ideally, you want to buy some new equipment and a truck specifically for work so you don’t run up the mileage on your personal vehicle. 

S corp status isn’t a great fit for this business because the money you’d have to take as a distribution could be better spent on the upgrades you want to make for your company. While you do run payroll, other S corp requirements (e.g., limiting your shareholders and taking a distribution) would, ultimately, prove detrimental to your business.

Start an S Corp FAQ

An S corporation (S corp) is a tax classification that an LLC or a corporation can apply for that provides self-employment tax savings on distributions.

If you already have an LLC or C corporation, you can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

S corps offer businesses tax advantages, and owners of S corps can save thousands of dollars on self-employment taxes.

While both LLCs and S corps benefit from pass-through taxation, they are not taxed the same way.

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.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

Landscapers in the United States earn an average salary of $39,647. This can vary, however, depending on how much experience you have and where you plan to work. Keep this in mind when researching information to determine your reasonable salary.

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employees’ salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket. 

In some states like California and New York, S corps may pay some form of tax at the corporate level.

No. You can still reinvest profits back into your business as long as you have the money to do so. The only thing you need to worry about is if you’ll have any profits left to reinvest in your company after you take the required distribution.

Yes. As the business owner, you count as one of your company’s shareholders. That means you’d be the only shareholder out of an S corp’s 100-shareholder maximum if you’re the only employee and have no other shareholders.