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


How to Start an S Corp as an Interior Design Company

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your interior design company save money on taxes. Interior design typically involves arranging spaces with an aesthetic eye, and many interior design businesses can benefit from arranging their business taxation.

Continue reading our step-by-step guide, How to Start an S Corp as an Interior Design Company, to learn more about S corporations and see if an S corp will benefit your interior design company.

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

Two interior designers discussing work.

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 interior design 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 interior design 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 Interior Design Companies 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. As required by the IRS, the salary you pay yourself must be “reasonable.” In other words, it should be equivalent to what someone else would earn for performing the same work. To determine your reasonable salary, you should research salaries for interior designers on resources like the US Bureau of Labor Statistics or Glassdoor websites.

Interior designer salaries currently range from $20,000 to $97,000, depending on experience and location. Glassdoor lists the average annual salary for this type of work in the United States at $58,021. For some perspective on how this changes by location, the annual salary for an interior designer is $64,377 in New York City, $56,760 in Phoenix, and $56,674 in Salt Lake City. Be sure to look into average salaries for interior designers in your area before filing for S corp status.

Distributions

Unlike with 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 an Interior Design Company 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.

Interior Design Company Information

As an interior designer, you’ll make indoor areas more inviting through the selection and recommendation of furniture, lighting methods, decorations, and other additions. Ultimately, your business will transform a home or business into the environment desired by its owner. 

While most common in larger cities and high-traffic areas, interior design companies can operate just about anywhere if they’re willing to commute for consultations or use telecommunications tools with clients. An estimated 148,000 interior design companies operated within the United States as of January 2023, making interior design a notable industry that continues to grow.

Why Most Interior Design Companies Should Have a Legal Business Entity

Interior design companies often become legal business entities for the protection it affords both employees and owners in the event of a lawsuit. If you get into a car accident while driving to a consultation, for example, the other driver may sue you. Having a formal business structure in place would ensure liability falls to the business so the other driver could only sue your company — not you.

If your interior design company is a legal business entity, that’ll also lend credibility to your business. A formal business structure tends to make a company more desirable to clients because it adds legitimacy. The simple act of becoming a legal business entity can have a large impact on your business.

Is an S Corp Right for My Interior Design Company?

Whether becoming an S corp is right for your business or not will depend on what you hope to accomplish with your business and if you meet the criteria set by the IRS. Running payroll, for example, is an important part of electing and maintaining S corp status. If you have several employees, you may already do this. But, for smaller companies or even firms run by only yourself, the additional cost of running payroll may be a detriment in the long run.

Another key consideration is that S corp status limits the number of shareholders in your company. To remain an S corp, your company may have no more than 100 shareholders at the time you file your taxes. If you want to take on a large number of investors or expand your business through other means, S corp status may not suit your interior design company.

You also need to consider the matter of reasonable salary and distributions. Maintaining S corp status requires you to not only pay yourself a reasonable salary based on your career and location, but also take at least $10,000 in distributions from the company’s profits. If you can’t take that much or would instead prefer to put the distribution money back into the company, then you won’t benefit from electing S corp status. In this situation, it’s more advantageous to have the IRS tax your company as an LLC.

The S corp tax designation is wonderful for some businesses, but unsustainable for others. Ultimately, you must do the research in order to make an informed decision about if it’s right for your interior design company.

Interior Design S Corporation Examples

While some interior design companies will benefit from electing S corp status, others won’t. Below are two examples to help illustrate which interior design businesses should elect this tax designation.

Scenario 1:

Let’s say you run a small interior design firm in an office located in a small town. In addition to you, you employ two other designers and a few part-time staff to operate the phones and perform reception duties. You’re considering running payroll for your employees because you’ve seen a significant increase in business since your first year and can now afford to do so. Because you have other interests that take up much of your time, you’re content with your business’s performance and aren’t looking to expand or find new investors. 

Given these circumstances, becoming an S corp likely would be a wise decision for you and your business. As long as you set up payroll for the business and take your distribution upon completing the paperwork, your interior design company should have no problems becoming an S corp.

Scenario 2:

In contrast, S corp status may not suit a small town-based interior design business looking to grow. Let’s say you’re actively seeking investors and more employees so you can turn your small interior design firm into a large company with many designers, offices in multiple locations, and a strong brand. Because of this, you’re networking with previous clients to see if they’re interested in becoming shareholders and investing all of your company’s excess profits back into the business. 

In this scenario, electing S corp status isn’t ideal because the money you’d take in distributions would be better used as a reinvestment in your business. Moreover, you’d lose S corp status if your company exceeded 100 shareholders.

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.

Interior designers make an average of $58,021 annually in the United States, according to data compiled by Glassdoor. While salaries vary based on a designer’s experience and location, expect them to earn somewhere around that number. Typically, interior designers in larger metropolitan areas earn between $56,000 and $60,000 while those in smaller towns and rural locations earn between $48,000 and $52,000.

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. If you find yourself in a position where S corp status is no longer advantageous or you move outside the IRS’s requirements, your company will default back to either a C corp or an LLC. Because businesses grow and change over time, there’s no fine or penalty for losing S corp status. If that happens, the IRS will tax your company as either a C corp or an LLC that year.

Your distribution can be as much as you can take — as long as you still have enough to pay yourself a reasonable salary, cover the cost of running payroll, and afford accounting services and other necessary expenses. However, you should aim to take at least $10,000 in distributions to get the most out of electing S corp status.