Start a New Jersey S Corp

S Corporation Requirements and Limitations 

The IRS has strict requirements for business entities filing for an S Corporation election. For corporations to qualify for S Corporation status, they must:

• Be a domestic corporation
• Have no more than 100 shareholders
• Have only allowable shareholders (e.g., individuals, estate, exempt organizations, and certain trusts)
• Have only one class of stock
• Not be an ineligible corporation, such as an international sales corporation, insurance company, or certain financial institutions

Clearly, not all businesses meet these qualifications, but you may want to speak with a legal or financial professional to discuss your options. 

Pros and cons of creating an S Corporation

While S Corporations are favorable among small business owners, they’re not for everyone. It’s important to look at the pros and cons of this entity type to see if it aligns with your business functions and goals. 

Pros

S Corporations are advantageous in terms of the asset and liability protection they provide, as well as their allowance for the cash method of accounting. 

The hallmark of the S Corporation, however, is its favorable tax treatment.  As discussed above, S Corporations are treated as pass-through entities, so for federal income tax purposes, their income is only taxed once at the personal level. Another tax advantage is that only a portion of the S Corporation’s earnings is subject to self-employment taxes. An S corporation can classify income distributed to employees and shareholders as either dividends or salaries. Dividends aren’t subject to self-employment tax. LLCs, on the other hand, must pay self-employment taxes on their entire profits. 

S Corporations also have the advantage of using the self-employment tax deduction and Qualified Business Income (QBI) deduction. 

Cons

Forming and maintaining a New Jersey S Corporation can be expensive and time-consuming. There are very strict stock ownership requirements imposed by the IRS to qualify as an S Corporation. There’s also plenty of room for error when meeting the tax qualification obligations, such as making the actual election, getting everyone’s consent, providing notification, and meeting the filing requirements. 

So if you make this election, know that the IRS closely scrutinizes S corporations because of their ability to classify distributions as either dividends or salaries. Also, keep in mind that an S corporation is only allowed one class of stock. Therefore, it doesn’t have much flexibility when it comes to allocating income and loss. 

What to know before creating a New Jersey S corporation

When you set up a business entity, there are default elections and tax treatments. S Corporation status isn’t the default status, but something you must intentionally elect. For corporations, the default is C Corporation election and double taxation (i.e., income is taxed at both the personal and corporate level when distributions are made). LLCs are automatically treated as disregarded entities and subject to pass-through taxation (i.e., all income passes through to the LLC owners, which they report on their personal income tax returns). 

What’s the difference between a New Jersey S corporation and C corporation?

The main difference between an S corporation and a C Corporation is its tax treatment. C Corporations are separate taxable entities that pay federal income tax at the corporate level, whereas S Corporations tax their income at the individual level when either shareholders or LLC members receive distributions. 

What are the requirements to create an S Corporation?

To create an S Corporation, you must first create an underlying entity, such as an LLC or corporation. Next, you have to file Form 2553 with the IRS to make the S Corporation election. Your entity must meet the IRS’s requirements, which are listed above, to qualify as an S Corporation. 

New Jersey has an additional requirement that any entity making an S Corp election also file an application with the Division of Revenue and Enterprise Services.

Can LLCs choose an S Corporation election?

Yes. LLCs can make an S Corporation election by filing Form 2553. LLCs typically do this for tax purposes, particularly for self-employment tax benefits. Check out our article on tax information for LLCs for more details. 

We Can Help

If you’re ready to start your business today, we’re here to help. With our S corporation formation service, we can create your S corporation in minutes. The same goes for the other business structures we can help form. Our experts are available to guide you through the process and get your business up and running quickly. 

Check out our other New Jersey business resources below for more information. From forming your business to writing your business plan and ensuring it’s compliant, we have the products, services, and tools you need to succeed.