Start an Oregon S Corp

Step 1: Choose a name 

Pick a unique name for your Oregon LLC. Choosing your company’s name is the first step to starting your Oregon LLC. Your name is how customers and clients will remember you. It’s also what draws in prospective buyers.

While your name needs to be catchy and memorable, it should also convey what you’re selling. If you’re forming an LLC with other owners, you’ll want their input to help ensure everyone agrees on the company name. Importantly, you also need to make sure your name is compliant with Oregon law.

We recommend making a list of potential names before conducting your Oregon business name search to see which names are available. You have to make sure that your LLC’s name doesn’t already belong to another company in Oregon. Follow the instructions on our Oregon Business Entity Name Search page to learn how to search for the names on your list. If they’re already taken, cross them off. If not, narrow your list down. In addition to the name search, it’s also wise to check for federal and Oregon state trademarks before committing to your LLC name.

Oregon Secretary of State Requirements

Next, make sure you review the additional requirements for naming your LLC in Oregon before settling on a name. From there, you’ll decide on the remaining names on your own or with the other members until you have the name that best fits your company and complies with Oregon laws.

When you have your name ready, you’ll also need to decide on an LLC “designator.” A designator is a suffix added to your company name to indicate that your business is an LLC. This means you’ll need to add a suffix like “LLC” to the end of your company name. You have three choices in Oregon: spelling out “Limited Liability Company” in full or using the abbreviation “LLC” or “L.L.C.”

Securing a Domain Name for Your Oregon LLC

While the above covers the basic steps for selecting an LLC name, there are some other factors you’ll want to consider. For instance, if you want to create a company website, you’ll need to find an available domain name, ideally one that matches up with your company’s name. You can do a fast domain name search to determine if your URL is free. Once you’ve found a domain name that makes sense, reach out to a professional company like ours to help you register your new domain name. 

Step 2: Designate your registered agent

Now it’s time to select an Oregon registered agent. Once your company name is chosen, you’ll need to find a registered agent for your Oregon LLC. A registered agent is an individual or business entity that receives important legal documents (such as service of process) as well as certain correspondence from the Oregon Secretary of State on behalf of your LLC.

Every LLC in Oregon is required to have a registered agent for their company at all times. Your Oregon registered agent can be an individual or business entity, as long as they meet state requirements. 

If the agent is an individual, they must be an Oregon resident who’s at least 18 years old. If the agent is a business entity, it must be authorized to transact business in Oregon. In either case, the agent must be available during normal business hours (typically 9 a.m. to 5 p.m. local time) at a designated physical street address so that they can receive service of process in person. The address can’t be a P.O. box or something similar.

Should you become your own registered agent?

Can you be your own Oregon registered agent? Technically, yes. Some companies decide to have an owner serve as their registered agent, but this isn’t always a good idea. Since the government will be reaching out to this agent with important legal documents (potentially including service of process), you won’t want to have this happen at your office, where you’ll be meeting with clients during normal business hours.

Registered Agent Services

Many LLCs opt to hire professional registered agent services for this purpose. Here are a couple of reasons you might want to use a professional registered agent service rather than acting as your own registered agent:

• Freedom to leave the office, as the registered agent must be present at the office during all normal business hours.
• If you’re designated as your LLC’s registered agent, and your office address changes, you’ll be required to refile forms and pay additional filing fees. If you work with a registered agent service, you can change your office address as much as you need to without refiling registered agent paperwork.

Consider ZenBusiness as your registered agent

Our registered agent service can give you peace of mind. Professional registered agent services will pass along all of your legal documents and paperwork to help ensure you remain in good standing.

Step 3: File the Oregon Articles of Organization 

File your LLC paperwork with the state. Now you’re ready to register your LLC with the state of Oregon. You’ll do this by submitting your Articles of Organization through the Oregon Secretary of State website. Once approved, this step makes your LLC official.

Dealing with official government documents like this can be intimidating for many people, which is why we’re here. With our business formation plans, our team of professionals handles the filing for you to make sure it’s done quickly and correctly the first time. But, although we can handle this for you, we’ll show you how the process works below.

What information is needed for the Articles of Organization?

You’ll need the following information to complete the Articles of Organization form (note that this information will become public knowledge):

• Your LLC’s name. Enter your LLC’s official name, including the LLC designator you selected.
• Your LLC duration. Check “perpetual” if you don’t have an end date in mind. Otherwise, specify the date when the LLC will dissolve.
• Your LLC’s principal office address. Enter the primary operating address for your LLC. This could be your office address or residential address.
• Your registered agent’s name and address. Enter your registered agent’s full legal name and operating address (located in Oregon). 
• Address where the state may mail notices. This is the address where renewal notices will be mailed. Other types of mail will also be delivered to this publicly available address.
• Your LLC management structure. Enter whether the member(s) will manage your LLC or if appointed or hired manager(s) will run the business.
• Professional licensed services. If your LLC will be providing a licensed professional service under ORS 58.015 (5), you’ll need to describe it here.
• Benefit company selection. Check this box if you’re forming a Benefit company.
• Indemnification:  Checking this box means that you want to indemnify your members, managers, employees, and agents for liability and related expenses under ORS 63.160 – 63.170. Basically, this provides for additional legal protection for them. If you need clarification, consult an attorney.
• List of LLC members and managers. Enter the names and addresses of all of the LLC’s members (owners) and any managers as they apply to your company.
• Select an individual with direct knowledge. Enter the name and address of one member or manager who will have direct knowledge and understanding of the company’s operations.
• LLC organizer signatures. This is where you and any other owners will sign.

How to File Your Paperwork

There’s a $100 fee for filing fee this form. You can submit the form directly online (Oregon encourages online filings) or mail it to the address below:Oregon Secretary of State
Corporation Division
255 Capitol St. NE, Suite 151
Salem, OR 97310-1327

Step 4: Create an operating agreement

Write your LLC operating agreement. At this point, you’re ready to start drafting your LLC’s operating agreement. This agreement isn’t required by Oregon law, but it’s strongly encouraged for all LLCs. Your LLC’s operating agreement will lay out how your LLC is managed and the different operational procedures to be followed. These agreements are particularly important for LLCs with multiple members, as you can create the way that voting structures and profits are managed.

If you’re the only member of your company, an Oregon LLC operating agreement might seem unnecessary, but it can be important. This document will help protect your business if you’re ever incapacitated or unable to manage your LLC. This will allow your company to continue operating as you’ve outlined. Without this agreement letting your wishes be known, your company will default to being run according to state law, which might not align with your wishes.

Here are some other reasons to consider drafting an Oregon LLC operating agreement:

• An LLC operating agreement can further delineate your company and personal finances, so your personal assets are less likely to be on the hook for company liabilities or debts.
• An operating agreement can make it easier to resolve or prevent conflict since management structures and voting guidelines will be clearly outlined within this document.
• An operating agreement makes your company’s operational practices apparent to all new members, investors, and managers, so they’ll know how your company is run before agreeing to join or do business with you.

Feeling unsure as to how to create an operating agreement for your LLC? We offer a customizable template to help get you started.

Step 5: Apply for an EIN

Get an Employer ID Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.

We can obtain this number for you with our EIN service.

In addition to registering for federal taxes, you’ll likely need to register for state and local taxes. For example, you may need to register with the Oregon Department of Revenue. Also keep in mind things like the Oregon corporation excise tax.

Step 6: Apply for S corporation status

Submit the form to apply for S corp election. 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 C 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.

One condition for LLCs wishing to file as an S corp: 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. 

Note that 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.

Advantages and Disadvantages of Filing as an S Corp

While S corp election comes with some benefits for some businesses, making this election might not be right for all businesses. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t quite the same as they are for C corporations. Let’s look at the advantages for LLCs first.

A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Self-Employment Taxes Explained

The members of a standard LLC are considered self-employed. They’re compensated by getting 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 LLC. This is more than what they’d pay when working for someone else because their employer would pay part of them.

Dividing Profits and Salary

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Once they do that, they only pay Social Security and Medicare taxes 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 personal income tax and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If not, you could pay yourself an annual salary of 15 bucks and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something akin to what others in your field are earning.

If the IRS determines that your salary isn’t reasonable, it can reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some negatives over a traditional LLC, too:

Stricter Requirements 

As we listed above, S corps have more qualifications than a standard LLC or C corporation. An S corp can’t have more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. 

In fact, LLCs filing as an S corp may want to observe some of the same formalities that corporations do, even if they’re not legally required to. It’s not necessary to appoint initial corporate directors and corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.

More Bookkeeping and Accounting

Having an LLC that files as an S corporation usually means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start doing so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp has its advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are taxed only at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We should note that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. Thus, the disadvantages of double taxation aren’t as severe now as they were. 

Writing Off Losses

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

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct as much as 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.

Qualified business income is basically your share of the company’s profits, or, as the IRS describes 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 more details 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 more info).  

Disadvantages of S Corp Status for C Corporations

S corp status also has its minuses:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue if the corporation expands and goes public later.

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 partnerships or corporations as shareholders. C corporations don’t have those limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s allowed for C corporations, but the IRS doesn’t allow it for S corps.

Additional IRS Scrutiny

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

It’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

Oregon-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income taxes. But what about state income taxes?

In Oregon, S corporations experience a “pass-through” tax structure where the corporation’s income, deductions, and credits pass through to the shareholders, who report this on their individual income tax returns. Oregon’s individual income tax rates range between 4.75% and 9.9%, depending on the taxpayer’s income level.

While the S corporation’s income is taxed at the shareholder’s individual tax rates, the corporation itself must still pay a minimum tax to the state, which is based on the S corporation’s Oregon sales. For sales up to $500,000, the minimum tax is $150 (this is only for S corps doing business in Oregon itself); it escalates from there, reaching $100,000 for sales over $100 million.

S corporations in Oregon are obligated to file an annual state business income tax return, Form OR-20-S, detailing the income, deductions, and credits, even if no tax is owed. Failure to file this form can result in penalties, making it crucial for compliance with state laws. Note that those who choose to organize in Oregon but don’t have Oregon-based sales or any other business in Oregon won’t be required to pay a minimum tax or to file Form OR-20-S. In fact, Filing Form OR-20-S when not required may create a tax bill for the minimum amount.

A couple of other points to note:

• Oregon S corporations must make quarterly estimated tax payments if they expect to generate $500 or more in sales in Oregon.
• Oregon S corporations are required to withhold part of a non-resident S corporation owner’s share of income but only when the S corporation has sales in Oregon.  

How We Can Help

Forming a business is often complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form an Oregon LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward.