Operating Your S Corporation

After your business is allowed to be treated as an S Corporation by the IRS for tax purposes, it is important for you to observe certain corporate formalities and meet specific reporting requirements. This is for you to maintain your S corporation status in good standing and continue to receive the asset protection and tax benefits afforded by the S corporation status.

Here is a list of some of the tasks throughout the year to operate your S corporation properly:

  • Draft and follow bylaws: Bylaws are the rules for the operation and interactions between shareholders. You will need a set of bylaws to show the IRS that your S corporation is distinct from the shareholder as an individual. You should know what your bylaws require, and comply with them before taking any action.
  • Hold meetings: Generally, S corporations are required to have at least one meeting of stockholders and one meeting of the board of directors each year. Elect directors and officers, issue stocks, and adopt bylaws at initial shareholders meeting.
  • Keep minutes: Draft minutes from the meetings and file them in your corporate book. It is important you hold meetings and keep minutes even if you are the only shareholder in your corporation.
  • Create a stock ledger and a corporate book: A stock ledger is a document that keeps records of the issuance and transfer of all shares, the names and addresses of all current shareholders, the number of shares held by each shareholder, etc. A corporate book houses all corporate documents including your bylaws, meeting minutes, and notices.
  • Setup payroll: S corporation status requires shareholders to determine and withdraw a reasonable salary. Shareholders are required to pay estimated taxes on their income from S corporation on their own personal tax returns. Setup your payroll system to file quarterly payroll reports and make deposits.
  • File tax returns: S corporations are required to file an annual corporate tax return (Form 1120S) even if there was no business activity during the year.
  • File annual reports: This is an annual filing required by the secretary of state to update the information on file for your S corporation. An accompanying fee is required to be paid on an annual basis.

S corporation can be a powerful tool for asset protection and tax savings. However, it comes with additional corporate formalities and administrative costs. Operating your S corporation can be time-consuming and maybe even a distraction from your focus of growing your business. Ask your CPA to help you operate your S corporation properly and handle most of the procedural work.

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