File a South Carolina S Corp

Embarking on the journey of starting an S corporation in South Carolina can be a strategic move for entrepreneurs looking to capitalize on the state’s business-friendly environment. While the process involves several steps, the effort can yield significant tax advantages for your business. This guide aims to demystify the procedure, outlining the essential steps to establish your S corp in South Carolina. From understanding the eligibility criteria to navigating the required paperwork, we’ll provide you with the insights needed to successfully launch your S corporation in the Palmetto State, helping ensure you’re well-prepared to take advantage of the benefits this business structure offers.

South Carolina S Corp Filing Requirements

An S corp has filing requirements you must meet for the IRS to accept your application. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic corporation or LLC
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Only have one class of stock
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business entity falls within the above parameters, you can apply for an S corp election. 

Considerations for South Carolina S Corp Taxes

In an S corp, the business itself doesn’t usually pay federal income taxes, just the individual owners. But what about South Carolina income taxes?

South Carolina does recognize federal S corp election, so an S corp in South Carolina won’t pay corporate income tax to the state. But S corps are still subject to the South Carolina corporate license fee, which is 0.1% of capital and paid-in-surplus, plus $15. There’s a minimum fee of $25.

South Carolina S corporations must also file Form SC1120S with the state every year.

How to Start a South Carolina S Corp

To get a South Carolina S corporation, you must first have a business structure, either a limited liability company (LLC) or a C corporation (the default form of corporation). Then, you’ll file an election form with the IRS.

Forming a South Carolina LLC

1. Pick a unique name for your LLC
2. Designate a registered agent
3. File Articles of Organization
4. Draft an operating agreement
5. Register your business with the IRS

For more details on these steps, visit our “Start a South Carolina LLC” page.

Forming a South Carolina Corporation

1. Name your South Carolina corporation
2. Appoint Directors
3. Choose a South Carolina Statutory Agent
4. File the South Carolina Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report

If you’d rather form a South Carolina corporation, that process involves more steps. Follow the instructions on our South Carolina corporation page for guidance.

File the form 2553 to apply for S corp election

When your LLC or corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

For LLCs wishing to file as an S corp, take note: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

All of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Pros and Cons of Filing as an S Corp in South Carolina for LLCs and Corporations

S corp election comes with a different set of pros and cons for an LLC.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. A normal LLC already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain.

Social Security and Medicare Taxes 

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the company. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.

Dividing Salary and Profits

When an LLC becomes an S corp, the members can be compensated in two ways, by receiving their share of the profits and by being employed by the LLC. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income tax and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

An important provision to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.09 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

Advantages of S Corp Status for C Corporations

If you have a C corporation, filing as an S corp has the following advantages:

Pass-Through Taxation

One major disadvantage for C corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. And when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

However, making a C corporation into an S corporation allows those profits to be taxed only at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.”

Qualified Business Income Deduction

With the 2017 Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your portion of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Losses to Write Off

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the business’s losses on their personal income statements. 

Disadvantages of S Corp Status for LLCs

S corp status for LLCs can have drawbacks, though:

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely. That might mean a greater chance of being audited.

Stricter Requirements 

S corps have more qualifying conditions than an LLC without S corp election. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A normal LLC doesn’t have these limitations.

More Accounting and Bookkeeping

If you love paperwork, there’s good news: Having an LLC that files as an S corporation generally means more of it. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start. Your taxes will be more complex, as well.

While S corp election does come with a number of tax benefits for some businesses, making this election might not be right for everyone. Be sure to weigh the pros and cons before making a decision, and consult a tax professional about whether the S corp election would be best for your business.

Disadvantages of S Corp Status for C Corporations

S corp status isn’t without its downsides for C corps:

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have corporations or partnerships as shareholders. 

Limited Number of Shareholders

As we said earlier, an S corp can’t have more than 100 shareholders, but a C corporation has no such restriction.

One Class of Stock

Corporations can sometimes attract investors by offering preferred stock, but the IRS doesn’t allow this for S corps.

More Attention from the IRS

Because of the extra limitations S corps have, the IRS watches them more closely to see if they’re in compliance. And so, your corporation is more likely to get audited.

Keeping Your S Corp Compliant

All South Carolina S corporations must file an annual report as part of their taxes. An annual report is intended to update the state on the basic information about your business. In many states, annual reports represent a function of the office of the Secretary of State. South Carolina is rather unusual in that the annual report is part of your corporate tax return, Schedule D of Form SC1120S for an S corporation.

Corporations in South Carolina are also required to hold annual shareholder meetings at a time and place established in the bylaws. Keeping corporate records, including the minutes of meetings and all actions of the directors, is another requirement for South Carolina corporations. 

Note that these may not be the only ongoing requirements for your South Carolina S corp. For example, you may have business licenses and permits that need to be renewed regularly, and you’ll likely need to keep up with estimated tax by making quarterly estimated tax payments.

State and Federal Resources

For more information about how S corps are treated in South Carolina and other important tax information, see the South Carolina Department of Revenue website. The IRS website can also provide more information on the federal guidelines for S corporations. We always recommend having a trusted tax professional by your side. They can help you with legal and financial challenges for your S corp.