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NARRATOR: S corporations combine the limited liability protection of C corporations with the tax benefits of a sole proprietorship, partnership, or LLC. As you might expect, forming an S corporation is an involved process.

Here are some of the basics. You'll need to file articles of incorporation. This requires a flat fee that is typically around $150 and some simple paperwork filed with the state. You'll also need to identify a registered agent, which can cost between $40 to $60 a year.

The purpose of a registered agent is to provide a legal address where there are people available during normal business hours to facilitate the legal service of process being served in the event of a lawsuit. Other requirements include electing directors, issuing stock certificates to initial shareholders, and even creating corporate bylaws during the registration process.

Lastly, you'll have to file form 2553 with the IRS to confirm your election as an S corporation. Where S corporations differ from C corporations is that they receive more tax benefits because their taxes pass through to the shareholders' personal tax returns.

Tax responsibilities will include monthly payroll taxes. S corporations are employers by default, so you will technically be an employee. Because of this, you'll need to file monthly payroll deposits your first year and abide by all other employer-related rules and regulations. Unlike C corporations, your S corporation will not need to make quarterly estimated tax payments. All profits generated by your company will pass through to you as dividends. Just keep in mind you'll need to make quarterly estimated income tax payments on this income.

Lastly, some states require a minimum annual franchise tax for all S corps, even if your business is not profitable. As you might expect, an S corporation is more high maintenance than some other business entities. Some of these responsibilities include holding annual shareholders meetings and periodic directors meetings, as well as maintaining detailed records of what these meetings consist of, known as recorded minutes, keeping detailed financial reports of income and shareholder dividends, and filing separate income tax returns, and maintaining a total separation between the corporation and its owners.

One of the advantages of being an S corporation is that if corporate formalities are followed, they typically provide a high level of personal liability protection for its owners while offering the tax benefits of a sole proprietorship or partnership.

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