How to Start an S Corp in North Carolina
North Carolina’s business climate consistently ranks as one of the best in the United States. It’s known as a tax-friendly state for businesses of all sizes that also provides access to a highly skilled and educated workforce. With its competitive labor market, low cost of living, and low cost of doing business, North Carolina is a great place to start a business.
Choosing a business structure can make a big impact on how the Internal Revenue Service (IRS) will tax your company. Forming an S corporation (S corp) in North Carolina could potentially save you money while also providing other business benefits.
This guide will walk you through everything you need to know to form your North Carolina S corp. It also offers some tips to help you keep your business in compliance to maintain your S corp status.
Not in North Carolina? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in North Carolina
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 North Carolina 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 North Carolina 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 forming an LLC because it’s simpler and more cost-effective.
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 North Carolina
Starting a North Carolina 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 North Carolina.
Be sure to choose a name that complies with North Carolina naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a North Carolina LLC:
- Your name must contain one of the following: limited liability company, ltd. liability co., limited liability co., ltd. liability company, LLC, or L.L.C.
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- You need certain approval to use any of the following words in your LLC’s name:
- bank, banker, banking cooperative, co-op, mutual, trust, architect, architecture, architectural, certified public accountant (CPA), engineer, engineering, insurance, pharmacy, prescription drug, drug, prescription, Rx, apothecary, realtor, surveyor, survey, surveying, and wholesale.
- Your name must be distinguishable from any existing business in the state.
You can also read the North Carolina state statute about LLC naming guidelines for more information.
2. Is the name available in North Carolina? Make sure the name you want is available by doing a business entity search on the North Carolina Secretary of State website.
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 North Carolina Registered Agent
You must elect a registered agent for your North Carolina 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 Articles 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 North Carolina LLC Articles of Organization
The North Carolina Articles of Organization is used to officially register an LLC.
File Your North Carolina Articles of Organization
OPTION 1: File Online With the North Carolina Secretary of StateFile Online
- OR -
OPTION 2: File by Mail or in PersonDownload Form
State Filing Cost: $125, payable to the Secretary of State (Nonrefundable)
The Secretary of State
Business Registration Division
P.O. Box 29622
Raleigh, NC 27626
Business Registration Division
2 South Salisbury St.
Raleigh, NC 27601
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 North Carolina 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:
Keep Your North Carolina S Corp Compliant
After you successfully obtain S corp status for your new North Carolina business, you’ll want to ensure it remains in good standing. This just means you need to keep your business in compliance with all applicable North Carolina state and local laws. In North Carolina, your business must file an annual report as well as stay up to date with taxes every year.
North Carolina S Corp Annual Report
Whether you have an LLC, corporation, limited liability partnership (LLP), limited liability limited partnership (LLLP), or S corp, your business must file an annual report with the North Carolina Secretary of State.
The state of North Carolina treats S corps just like other business entities — aside from their distinct tax treatment. That means S corps, like all businesses within this state, must file an annual report every year by the 15th day of the fourth month following the business’s fiscal year-end.
Visit our North Carolina Annual Report guide for a step-by-step overview of the filing process.
North Carolina 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 North Carolina 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.
North Carolina Income Taxes
North Carolina has a varied income tax rate schedule that changes annually. Here’s the current tax schedule:
- For taxable years starting in 2022, the income tax is 4.99%.
- For taxable years starting in 2023, the income tax rate is 4.75%.
- For taxable years starting in 2024, the income tax rate is 4.6%.
- For taxable years starting in 2025, the income tax rate is 4.5%.
- For taxable years starting in 2026, the income tax rate is 4.25%.
- For any taxable years after 2026, the income tax rate will be 3.99%.
While North Carolina imposes a state income tax like most other states, the percentage falls in the median for tax burdens. North Carolina offers businesses a number of tax incentives, a great labor market, and a low cost of living that together make this state a great place to start a business.
North Carolina Sales and Use Tax
North Carolina has a 4.75% state sales and use tax. Local counties within the state also have the authority to impose their own sales and use tax. Check with the North Carolina Department of Revenue for more information.
Additional State Taxes
The North Carolina Department of Revenue also provides details on other state-specific taxes that may apply to your business. Some examples of additional taxes your business may have to pay include:
- Alcoholic Beverages Tax
- Tobacco Products Tax
- Solid Waste Disposal Tax
- Motor Fuels Tax
- Motor Vehicle Lease and Subscription Tax
Visit the North Carolina Department of Revenue website for more information.
North Carolina Local Taxes
Each local municipality in North Carolina may have a tax structure that applies to your business. Whether you conduct business in Charlotte, Ashville, or another town or city within the state, check with your local government to ensure your business remains in compliance with local laws.
Start a North Carolina S Corp FAQ
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.
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.
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.
North Carolina has a booming economy with businesses focused on construction, transportation, real estate, warehousing, tourism, and more. Businesses in any industry can save money on their taxes by forming a North Carolina S corp.
If you plan to do business locally in North Carolina, forming an S corp can help you save money at tax time. While it does have a small income tax rate, North Carolina’s attractive business incentives and low cost of living make it a great state for S corps.