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


How to Start an S Corp for Your Marketing Company

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your marketing company save money on its taxes. Clients hire marketing companies to help them increase their brand awareness and boost sales through a variety of methods. 

Whether your marketing company is fairly new or has been around for a while, electing to have the IRS tax it as an S corp 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.

Two people discussing their company logo and marketing.

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 marketing 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 marketing 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 Marketing 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. S corp owners must pay themselves a “reasonable” salary — the equivalent of what someone else doing the same work as them would earn. For help finding pay ranges and salary averages to reference, check out online resources like Glassdoor and the US Bureau of Labor Statistics.

As of March 2023, the average salary of a marketing company employee in the United States is $57,619. This figure can vary, however, based on your level of experience and location. Remember to factor this in when doing your research and before deciding on a salary you deem reasonable.

Distributions

Unlike with a 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 Marketing Company Elect S Corp Status?

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 LLCs 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.

Marketing Company Information

Marketing companies use tools like advertising campaigns and social media to promote their clients in a positive light, hoping to increase sales and build brand awareness among the general public. While larger businesses use their services most often, marketing companies can be just as effective for local businesses. 

Because marketing businesses rely on having a large pool of clients, most of them operate in larger cities. However, location is less important than it once was because marketers can now do much of their work remotely. As of January 2023, an estimated 80,000 marketing and advertising agencies operated within the United States.

Why Most Marketing Companies Should Have a Legal Business Entity

Liability protection is the main reason a marketing company should register as a legal business entity. Because your business relies on the public image of others, you could face a legal mess if a client is unsatisfied with your service. Having a formal business structure will protect you and your employees from lawsuits if a third party ever sues your company.

For example, let’s say a large corporation hires your marketing company. Your most recent marketing campaign showcases the philanthropy work this company claims to perform. It later comes out that the philanthropy work it claimed to do is false and the corporation has no involvement. Your client blames your marketing campaign for bringing this to light, and tries to sue you. This client can’t sue you as an individual if your company is a legal business entity. They could only take your business to court.

Is an S Corp Right for My Marketing Company?

Your marketing company must meet certain criteria in order to qualify for S corp status. 

First, you must run payroll for all of your employees. That includes you as the owner. This can prove costly for small businesses — especially those with only one employee. If your business already runs payroll, this won’t be an issue. If not, the additional yearly cost of running payroll may seem like too much when compared to what you’d save on your taxes as an S corp.

S corps also can’t have more than 100 shareholders. The number of shareholders tends to vary from business to business so this maximum may not pose a problem for you. But, if you think a maximum of 100 shareholders will feel too limiting for your marketing company, you may want to have the IRS tax your business as a C corp.

Lastly, the IRS requires S corp owners to take a distribution of their company’s net profits in addition to their reasonable salary. In order to fully benefit from the tax advantages an S corp offers, you’ll need to take at least $10,000. If you’d rather reinvest that money back into your business, electing S corp status may not suit your marketing company. In that case, you may want to consider having the IRS tax your company as an LLC instead.

In the end, only you can decide what’s right for your business. Keep these requirements and your marketing company’s long-term goals in mind when doing your research and making your decision.

Marketing Company S Corporation Examples

Not all marketing companies will benefit from the S corp tax designation. Here are two examples to help illustrate which marketing companies should elect S corp status.

Scenario 1:

Imagine you run a marketing company in a large city with 15 employees, including yourself. You started running payroll as soon as you began operating. Your company has several clients that include local businesses, large companies, and even a few well-known celebrities trying to break into new fields. 

Your business has become quite lucrative, generating more than enough money to pay for its business expenses and employee salaries. Your shareholders feel comfortable with the projections for the coming years and don’t advise making any major changes.

This marketing company should seriously consider becoming an S corp. Because you already run payroll, that won’t be an issue. You also seem to make enough money that taking a distribution shouldn’t cause any financial strain. As long as your shareholders remain below the maximum of 100, this company is in a prime position to benefit from the S corp tax designation.

Scenario 2:

Now, let’s say you run a similar marketing company that operates in a large city. You run payroll for all of your employees and have a steady stream of clients. During the last meeting with your shareholders, however, they revealed they want to see more growth from your business. They also want you to move into a new office that looks more professional than the one in which you currently operate. Hopefully, this change will attract even more clients to make your company more profitable in the future. 

Even though this business runs payroll and may fall under the 100-shareholder limit, it likely isn’t a good candidate for electing S corp status. As you focus on reinvesting profits back into your business, you may not want to take a distribution to ensure you can afford what you need. While you can certainly file for S corp status later on, it’s not the best fit right now.

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.

The average salary of a marketing company employee in the United States is $57,619. This number can vary, though, depending on your level of experience and location. Remember to factor these variables in when researching the right amount for 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.

Yes. But, the original shareholder must forfeit their position before the new shareholder joins. Otherwise, you’d temporarily have 101 shareholders — a situation that would disqualify you from S corp status.

Yes. But, this is less common than LLCs electing S corp status. C corps often exceed the 100-shareholder maximum for S corps. If your C corp can stay at or below that limit, you can file for S corp status.