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There are several essential steps to switch from a sole proprietorship to an S corporation. Many people who go into business on their own choose to operate as a sole proprietor. As the business grows, they may find that they don’t have the right business structure for their tax and accounting needs. If you’re a business owner looking to switch your sole proprietorship to an S corp, you need to complete several simple procedures. Read on to discover how to switch from a sole proprietorship to S corporation.
Ensure Eligibility
To switch your sole proprietorship to an S corporation, you first must ensure your eligibility. Unlike basis corporations, there are certain restrictions on the types of companies that can become S corporations. Where your company conducts business, how much you pay your employees, and the type of business you can own is federally regulated. For example, a company that earns most of its income from exports is not eligible to become an S corp. In addition, if your company has foreign or corporate investors, you are not eligible for S corp status. Form 2553 contains a complete list of restrictions for S corp eligibility. Before starting the process to change your business structure, you must ensure your eligibility.
File Articles Of Incorporation
Next, you need to file the Articles of Incorporation. Typically, you can obtain these forms from the Secretary of State. These offices are usually in charge of business entities. Federal tax law requires S corporations to comply with specific requirements that must be reflected within this certificate. For instance, an S corp must only have one class of stock. Plus, they cannot have more than 100 shareholders. Moreover, shareholders must be individuals, certain trusts, or estates to qualify for the S corp. It is essential to fill out the Articles of Incorporation are essential switch your sole proprietorship to an S corp.
Fill Out Form 2553
In addition, you need to fill out Part I of Form 2553 to when forming a corporation. Also known as the “Election By A Small Business Corporation” form, all shareholders must sign it before submitting it to the IRS. When filling out the form, be sure to have your EIN and incorporation date on hand. Importantly, you also need to enter the contact information for your legal representative. This will be who the IRS contacts if they have a question about the form. Additionally, if you have over 100 shareholders and some are family members, check the appropriate box on the form. It is imperative to fill out Part I of Form 2553 to approve your entity structure change.
Select Your Fiscal Year
Some businesses need to select their fiscal year on Form 2553 under Part II. This section only applies to companies whose tax year will not operate on the calendar year. For example, this may be applicable to seasonal businesses and any others that have a purpose for operating on an alternative schedule. If you think you might need an alternative tax year, consult with an accountant or financial advisor. Many businesses don’t need to fill out Part II of Form 2553. Nevertheless, if you have an alternate tax calendar, select your fiscal year before you submit the form.
File Operating Agreement
Furthermore, you need to file your operating agreement within the state your S corp is registering. For instance, to form your corporation in Florida, you must file this document with Florida’s Dept. of State. This document outlines your business’s organizational structure as well as how it will be run. Usually, it will include your Articles of Incorporation as well as your company bylaws. Typically, your corporation’s board of directors establishes bylaws as a set of rules and regulations regarding internal company management. Each state has different filing requirements and agencies responsible for recording corporate documents. Contact the Secretary of State’s office for proper operating agreement filing procedures.
There are several essential steps to switch from a sole proprietorship to an S corporation. First, you need to ensure that your business is eligible to change to an S corp entity. Next, file the Articles of Incorporation with the Secretary of State. In addition, you need to fill out Part I of Form 2553. From there, select your fiscal year if your company has an alternate tax calendar. Further, file an operating agreement according to your state’s regulations. Follow these steps to switch from a sole proprietorship to an S corporation.
