A sole proprietor may benefit from converting to an S Corporation. While a sole proprietor is personally liable for business debts, shareholders of an S Corporation are not liable for the corporation’s liabilities. Neither business structure pays income taxes directly; instead, sole proprietors and S corporation shareholders both declare income earned by the business on their personal tax returns.
File for corporate status. To qualify as an S corporation, a business must first incorporate. Incorporation requirements vary, depending on the state where the business is located. Generally, to incorporate you must choose individuals to serve on the board of directors; check the availability of your corporation’s name in your incorporating state; draft articles of incorporations and bylaws; file the relevant documents with the Secretary of State where your business is located; and open a separate bank account for the corporation.
Apply for an Employer Identification Number (EIN) if you do not have one. An EIN is a federal tax identification number that every corporation must have, whether or not the business plans to hire employees. A corporation can obtain its EIN immediately by applying online through the IRS website. An EIN can also be obtained by calling 800-829-4933 or by faxing or mailing a completed Form SS-4 to the IRS. The instructions for Form SS-4 will tell you where to fax or mail your completed form.
File for S corporation status with the IRS. You must file a completed Form 2253 with the IRS to be recognized as an S corporation. The form must be filed within two months and 15 days from the beginning of the first year when the business is to be treated as an S corporation.
Consider hiring a local attorney to help you prepare the necessary documents to incorporate and elect to be treated as an S corporation. If you do not wish to hire a lawyer, you may want to consider using a document preparation and filing service such as LegalZoom.com.
To qualify as an S corporation, the business must have fewer than 100 shareholders and only one class of stock. Only individuals, estates and certain trusts can be shareholders. Certain businesses, such as insurance companies, cannot be S corporations.