Last Updated: February 16, 2024, 2:17 pm by TRUiC Team


Should I Start an S Corp by Myself or Use a Service?

Many entrepreneurs ask themselves, should I start an S corp by myself or use a service? 

An S corporation (S corp) is an IRS tax classification, which requires accurate completion of forms, detailed accounting, and other meticulous business needs. You could start an S corp by yourself as long as you understand all of the S corp requirements the IRS expects from your business and are ready to handle the paperwork it entails — all while you run your business. 

Using a professional service to start or convert your limited liability company (LLC) or corporation into an S corp can ensure that all of the necessary documentation will be completed and filed correctly — and in a timely manner — so you can have peace of mind. An S corp service can also notify you of upcoming deadlines and help you remain compliant with the proper government agencies. Read on to find out if you should start an S corp or let a professional service do it for you.

Recommended: If you’re a solopreneur earning at least $60,000 in profits after salary with $20,000 in annual distributions, let a professional service like Collective handle all your S corp formation, paperwork, monthly accounting, and more.

Smiling entrepreneurs at business meeting

What is an S Corporation?

If you’re a self-starter, like many business owners, you may have wondered, should I start an S corp or use a service? The answer to this question will be different for every business owner and depends on their comfort level handling important government documentation that can affect their business. 

More importantly, you may have asked yourself, what is an S corporation exactly, and do I need one? 

An S corporation (S corp), or Subchapter S, is a tax classification under the IRS code that a limited liability company (LLC) or a corporation may elect for tax purposes. In an S corp, owners (shareholders) become employees who receive a reasonable salary that is taxed differently from shareholder distributions — which only pay income tax — resulting in significant tax savings on self-employment taxes. 

Can I Start My Own S Corp?

If you’re a new entrepreneur starting your own business, you can start your own S corp. Starting an S corp requires that you first start an LLC or a C corporation (C corp) by correctly completing and filing the proper forms (a C corp is the default tax classification for a corporation). You would then have to elect S corp tax status and submit IRS Form 2553 for your LLC or C corp as long as your company meets the S corp requirements (see below). 

We generally recommend starting an LLC instead of a corporation because it’s easier to start and manage. It also has less government oversight than a C corp.

S Corp Requirements

The following are the S corp requirements a business must meet, according to the IRS, before starting an S corp or converting an existing business:

  • Have 100 shareholders or less
  • Are domestic LLCs or corporations
  • Can issue only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Are owned by private individuals

Why Should I Use a Service to Start an S Corp?

There are many reasons why you should use a service to start an S Corp. For starters, they are experts that are in business solely to start S corps for business owners! They are familiar with all the proper documentation, can provide accurate completion of forms, and know exactly how, to whom, and where to submit the information. 

A service like Collective can even go beyond these steps and become an extension of your business since they handle your monthly bookkeeping and accounting so you can focus more on your business. 

Below are some pros and cons of starting an S corp with a professional service.

Pros

Expertise in business formation

  • LLC 
  • Corporation 
  • Electing S corp tax status and filing

Compliance Notifications

  • Annual report (state-specific)
  • Avoid violations, fines, or penalties
  • Compliance requirements
  • Business compliance maintenance

Regulatory Deadlines

  • Avoid fines, penalties, or business dissolution.
  • Remain up-to-date
  • Prevention of loss of S corp status
  • Services file documents for you

Customer Service Professionals

  • Can provide guidance
  • Have answers to recurring business owner questions 
  • Can handle issues for different business types
  • Available during business hours and, in some cases, all day
  • Have a responsibility to deliver on their services

Cons

Costs

  • There are fees involved in using an S corp service in addition to required state fees.
  • You may not want to pay for additional services you don’t need

Other

  • Business does not meet S corp requirements
  • You may not want to deal with a third party handling your documents

Only you can decide whether or not a professional S corp formation service is the right choice for your business. However, an S corp service gives your business peace of mind and provides an experience that you may only be able to acquire through trial and error. 

Your business is important to you and it makes sense to correctly set it up from the start. A professional service can help you prevent many mistakes as well as avoid fines, penalties, and in some cases even S corp dissolution.

When Should a Business Elect S Corp Status?

If you’re ready to start an S corp either by yourself or if you choose to use a professional service, it might help to understand when a business should elect S corp status. A small business could save on taxes by electing the S corp tax status if the following criteria is met:

  • The business meets S corp requirements and restrictions
  • The business earns enough in net profits to pay a "reasonable salary" and makes at least $20,000 in annual distributions
  • The addition of payroll and accounting costs don’t outweigh tax advantages

Once you meet the previous criteria, you should consider if reinvesting in your business is important or if you’d rather take the money out of the business for personal gain. A default LLC allows you to reinvest in the business, while an S corp allows you to pocket the tax savings and use them, for example, to pay for your health insurance premiums.

Our S Corp Tax Calculator tool below is a great way to calculate what type of potential tax savings you’ll have by starting an S corp.

S Corp Savings Calculator

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

Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Find your all-in-one S Corp business solution with Collective.

Steps to Take After Forming an S Corp

Once you formalize your S corp, consider adding a business phone line to protect your personal information with phone.com

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.

FAQs

An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply for through the IRS by completing and filing Form 2553 Election by a Small Business Corporation. 

C corporations (C corps) and S corporations (S corps) are two different types of tax statuses. S corps and C corps are often misunderstood to be business structures.

S Corporation

In an S corp, the business itself is not taxed.

An S corp allows business owners to become employees of the business and can reduce the tax burden under the right circumstances. LLCs and corporations can elect an S corp status. S corps have pass-through taxation, meaning that all profits are passed down to the members as in a default LLC. 

The members (owners) of LLCs are not salaried employees like in an S corp, so profits pay both income tax and self-employment taxes on the shareholder's personal income tax. In an S corp, the owners or members save on employment taxes due to only the salary being subject to self-employment taxes; the distributions only pay income tax. 

C Corporation

In a C corp, the business is taxed at a flat rate (currently 21%). A business taxed as a C corp faces double taxation because after the business is taxed, the shareholders are then taxed on their distributions on their personal income tax. For some corporations, the benefits can outweigh the disadvantages of double taxation.

Learn more in our S corp vs. C corp guide.

No. An S corp is a tax status that an LLC or a corporation can elect to report a business's federal and state income taxes.

You can form an S corp by starting an LLC or a C corp and filing Form 2553 with the Internal Revenue Service (IRS) to elect S corp status.

S corps must meet four requirements:

  • They can have no more than 100 shareholders.
  • All shareholders must be US citizens who are private individuals (not other business entities).
  • Shareholders cannot be nonresident aliens.
  • The business may only issue one class of stock — this means all members must have the same distribution amount.

Owners of S corps are considered employees of their company, and they can save thousands of dollars on self-employment taxes as a result.

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.

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 return. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

Yes, S corp income passes through to the owner’s individual tax returns and is subject to state income taxes.

For more information, see our S Corp Taxes guide.

Yes, an S corp owner must take a reasonable salary per IRS guidelines. Reasonable is defined as being a fair market salary for the work performed.

For more information, see our What is an S Corporation guide.

Unlike a default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.

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.

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owner’s personal income tax rate.

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

LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.

How LLC owners pay themselves depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity.

In a single-member LLC (SMLLC) or multi-member LLC (MMLLC), you can pay yourself:

  • a distribution that passes through to your individual tax return, or
  • a reasonable salary and distribution as an S corp

Read our guide to learn more about how to pay yourself from an LLC.

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